Omnicell, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Omnicell supplies medication and supply dispensing automation, central pharmacy automation, analytics software, and medication adherence solutions, primarily to healthcare customers. Beginning January 1, 2019, the company reports as one operating segment following an organizational realignment.
Financial performance
Unless otherwise stated, amounts are in millions of dollars.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $217.4 | $188.7 | $419.9 | $371.3 |
| Gross profit | $104.0 | $88.8 | $201.2 | $171.2 |
| Gross margin | 48% | 47% | 48% | 46% |
| Operating income | $18.8 | $7.3 | $31.5 | $8.0 |
| Net income | $16.0 | $6.6 | $19.3 | $9.3 |
| Diluted EPS | $0.37 | $0.16 | $0.45 | $0.23 |
- Revenue mix and growth: Q2 product revenue rose 18% to $158.4 million; services and other revenue rose 9% to $59.0 million. For the first half, product revenue increased 15% to $304.0 million and services revenue increased 9% to $115.9 million.
- Profitability: Q2 gross profit grew 17%; first-half gross profit also grew 17%. Management attributed improved gross margin mainly to lower XT-series manufacturing ramp-up costs and economies of scale. Operating expenses increased 5% in Q2 and 4% in the first half.
- Cash flow: First-half operating cash flow was $53.8 million, versus $40.7 million. Investing cash outflow was $32.0 million, including $22.6 million for software development and $9.4 million for property and equipment. Operating cash flow less investing outflow was $21.8 million, compared with $12.7 million in the prior period.
- Liquidity: Cash and equivalents were $87.5 million at June 30, up from $67.2 million at year-end. Working capital was $218.5 million; the current ratio was 2.0:1, compared with 1.9:1 at December 31, 2018.
- Debt and leases: Gross term-loan debt was $80.0 million, down from $140.0 million at year-end after $60.0 million of repayments; debt net of issuance costs was $76.6 million. No revolving-facility borrowings were outstanding, and the company reported covenant compliance. Operating lease liabilities totaled $65.5 million, recognized following adoption of the new lease standard.
Changes, outlook, and notable items
- Management linked revenue gains principally to automated dispensing cabinet growth, especially XT-series products, IV solutions, higher service-renewal fees, and a larger installed base. U.S. revenue accounted for 90% of Q2 revenue, up from 87% a year earlier; international revenue remains exposed to currency fluctuations.
- Management said existing cash, expected operating cash flows, employee equity-plan proceeds, and available credit should cover working capital, capital expenditures, potential acquisitions, and other obligations for at least the next 12 months. No specific revenue or earnings guidance is provided in the supplied filing text.
- The company continued its Autonomous Pharmacy strategy, including investment in differentiated products, new markets, cloud and subscription offerings, and potential acquisitions and partnerships. It cautioned that installations, customer demand, product adoption, and installation capacity affect revenue timing and growth.
- Tax expense was affected by discrete items: the first half included a $9.6 million tax expense associated with an intellectual-property transfer, partly offset by a $7.0 million equity-compensation tax benefit. The first half of 2018 included a $4.2 million check-the-box tax benefit and a $2.6 million equity-compensation benefit. The effective tax rate before discrete items was 24.8% in 2019 versus 16.5% in 2018.
- Omnicell raised $37.8 million net through at-the-market stock sales in the first half, issuing approximately 460,000 shares; $31.5 million remained available under the program. The resulting share issuance is a potential source of dilution.
- ASC 842 lease accounting was adopted January 1, 2019, adding right-of-use assets and lease liabilities to the balance sheet; management said adoption did not affect opening equity or prior-period operating results and cash flows.
- Risks include healthcare customers delaying capital purchases or installations, competition and product-adoption uncertainty, supply constraints and tariffs, cybersecurity and privacy exposure, and dependence on successful product development and integration. The filing reports $61.3 million of non-cancelable purchase commitments, mostly expected to be paid in 2019.
- Legal matters include pending Illinois biometric-privacy class actions and an insurer declaratory-judgment action. A separate putative securities class action filed July 18, 2019 alleges false or misleading statements beginning in October 2018 concerning revenue recognition, implementation issues, and a potential inventory write-off. The company said it intends to defend the suits; it recorded no accrual for the described legal contingencies, stating potential losses were not considered probable and a range could not be reasonably estimated.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess whether revenue growth, product bookings, and service renewals translate into timely installations and sustained margins; bookings and future revenue guidance are not quantified clearly in the supplied filing text.
- Track cash conversion and working-capital needs, including receivables, inventory buildup, lease investments, and continued software-development spending.
- Review debt repayment capacity, credit-facility covenants, the $81.6 million of future operating lease payments, and purchase commitments.
- Monitor dilution from the ATM offering, employee equity compensation, and the remaining authorization to issue shares under the program.
- Follow the BIPA and securities litigation, related insurance coverage, and any developments in revenue recognition, implementation, or inventory matters alleged in the securities complaint.
- Evaluate the impact of discrete tax items and future effective tax rates, as well as exposure to tariffs, foreign exchange, cybersecurity, and customer installation delays.