Business context and reporting period
Omnicell, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2018. The company provides medication and medical-supply automation, analytics and medication-adherence solutions, primarily to healthcare providers. It reports two segments: Automation and Analytics, and Medication Adherence. U.S. customers generated 87% of quarterly revenue.
Financial performance and liquidity
Amounts below are in millions except per-share data and percentages; prior-year figures are for the three months ended March 31, 2017.
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $182.6 | $148.6 |
| Gross profit / gross margin | $82.5 / 45% | $62.2 / 42% |
| Operating income (loss) / margin | $0.6 / less than 1% | $(16.6) / (11%) |
| Net income (loss) | $2.7 | $(10.3) |
| Diluted earnings (loss) per share | $0.07 | $(0.28) |
| Cash from operating activities | $18.9 | $28.2 |
| Cash and cash equivalents, period-end | $43.8 | $46.3 |
Revenue increased 23%, led by product revenue, up 32% to $130.1 million; services and other revenue rose 5% to $52.5 million. Automation and Analytics revenue was $151.4 million, up 24%; Medication Adherence revenue was $31.2 million, up 18%. Automation and Analytics gross margin improved to 48% from 44%, while Medication Adherence gross margin declined to 30% from 33%.
Operating expenses rose 4% to $81.8 million. A $4.8 million income-tax benefit helped produce net income despite a $2.1 million pretax loss. The company reported working capital of $150.8 million and a current ratio of 1.7:1 at quarter-end. Debt under its credit facilities was $214.5 million gross ($208.2 million net of unamortized issuance costs), comprising $180.0 million of term loans and $34.5 million drawn on the revolver. It reported compliance with debt covenants.
Cash from operations decreased year over year, with working-capital movements including inventory growth of $6.9 million and a $9.4 million decrease in accounts payable; increased deferred revenue provided a $15.1 million offset. Investing used $14.5 million, mainly for $9.3 million of property and equipment and $5.3 million of software development. Financing provided $5.7 million, including employee equity-plan proceeds, partly offset by $2.5 million of debt repayment and $1.3 million of employee tax payments on vested restricted stock.
Material changes versus the prior comparable period
- Revenue growth was driven in Automation and Analytics largely by XT Series sales, which increased $24.0 million year over year; the company attributed the comparison partly to slower conversion of bookings and backlog in Q1 2017 following the product launch.
- Gross margin increased three percentage points overall, while operating results improved from a prior-year loss. The 2017 period included a $3.8 million restructuring accrual; Q1 2018 included a new commercial-group realignment with estimated costs of $1.5 million, of which $1.4 million was unpaid at quarter-end.
- Operating cash flow was lower despite the return to net income, reflecting different collection and payment timing and other working-capital movements.
- Omnicell adopted ASC 606 using the full retrospective method. The prior-period figures shown were adjusted; accounting changes include presentation of GPO fees as reductions to product revenue and revised timing for certain software-license revenue and contract-acquisition costs. Comparisons should be assessed on that restated basis.
Outlook, commentary, risks and unusual items
The filing provides no specific numerical revenue, earnings or margin guidance. Management said existing cash, expected operating cash flows, employee equity-plan proceeds and available credit were expected to fund working capital, capital expenditures, potential acquisitions and other obligations for at least the next 12 months. Its stated strategy emphasizes differentiated products, new markets, and acquisitions and partnerships. Management identified timely customer installations, order conversion, product quality, and the ability to meet demand as important to growth.
Key risks discussed include healthcare-provider capital-spending uncertainty; competition and acceptance of new products; installation delays that can defer revenue; integration of acquisitions; supplier and consumable-production disruptions; cybersecurity, privacy and interoperability; foreign-exchange exposure; and debt and covenant obligations. A 1% increase in interest rates was estimated to add approximately $1.1 million of annual interest expense on debt exposed to rate fluctuations. The company had a $100 million interest-rate swap, with $114.5 million of debt exposed to rate changes at quarter-end.
Omnicell disclosed a product-liability lawsuit filed in Virginia in January 2018, naming the company and subsidiary Aesynt among defendants. The company had not been served as of the filing and intended to defend the case. It recorded no related accrual because management considered a loss reasonably possible but not probable and could not estimate a loss range. Separately, an April 30, 2018 settlement concerning contingencies from the Ateb 2016 acquisition was approximately $2.5 million and was to be recognized in Q2 2018. The company also had $55.4 million in non-cancelable purchase commitments and $77.2 million in minimum operating-lease payments.
The company had not completed its accounting for all effects of the 2017 Tax Cuts and Jobs Act; it said the assessed impact of certain international provisions was immaterial. Gross unrecognized tax benefits were $11.6 million at March 31, 2018. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether XT Series and other product bookings convert into installations and recognized revenue on schedule, and whether the Q1 growth rate is sustainable.
- Whether the gross-margin improvement persists, particularly given the decline in Medication Adherence margin and product-mix sensitivity.
- Whether operating cash flow strengthens as inventory, payables and other working-capital balances evolve.
- Debt repayment capacity, revolver availability, covenant compliance and exposure to variable interest rates.
- Developments in the Virginia product-liability matter, the Q2 Ateb settlement, and the final accounting for tax-reform effects.
- The impact of ASC 606 adjustments when comparing reported results with earlier filings.