Omnicell, Inc. — Q3 2016 Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended September 30, 2016. Omnicell provides automated medication and supply management systems, analytics software, related services, and medication-adherence packaging. Results include Aesynt from its January 5, 2016 acquisition; its operations are reported in Automation and Analytics.
Key financial metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $176.7 million | $125.2 million | $520.6 million | $354.2 million |
| Gross profit / margin | $81.5 million / 46% | $63.7 million / 51% | $239.5 million / 46% | $182.9 million / 52% |
| Operating income | $4.9 million | $13.9 million | $6.7 million | $36.7 million |
| Net income | $2.0 million | $8.0 million | $0.4 million | $23.1 million |
| Diluted EPS | $0.05 | $0.22 | $0.01 | $0.63 |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $24.5 million | $5.9 million |
- Q3 revenue grew 41%; nine-month revenue grew 47%. Product revenue rose 32% and 38%, respectively, while service and other revenue rose 77% and 83%.
- Automation and Analytics generated $152.4 million of Q3 revenue and $450.0 million for nine months; Medication Adherence generated $24.3 million and $70.6 million, respectively.
- At September 30, cash and equivalents were $47.3 million, working capital was $138.9 million, and the current ratio was 1.7:1. Cash was $82.2 million at December 31, 2015.
- Debt under the credit facilities was $230.0 million gross ($223.2 million net of unamortized issuance costs), including $35.0 million on the revolver and $195.0 million on the term loan. The company reported compliance with its covenants.
- Total assets were $931.4 million, including $311.4 million of goodwill and $187.6 million of net intangible assets. Total liabilities were $503.9 million.
Material changes versus prior comparable periods
- Revenue growth was driven substantially by acquisitions, especially Aesynt. Aesynt contributed $21.3 million of Q3 product-revenue growth and $17.4 million of Q3 service-revenue growth. For the first nine months, Aesynt, Mach4, and Avantec contributed approximately $77.0 million of product revenue and $54.3 million of service-revenue growth in Automation and Analytics.
- Despite higher revenue and gross profit, margins and operating income declined. Management attributed lower gross margins to product mix and acquired-company margins, including purchase-accounting inventory step-up and amortization of acquired technology and backlog. Operating expenses also increased with acquisitions, headcount, and investment in research and development.
- Nine-month other expense increased to $6.8 million from $1.6 million, and the company reported a pretax loss of $0.1 million versus pretax income of $35.0 million a year earlier. The prior-year period included a $3.4 million gain on a business combination.
- Operating cash flow improved year over year, but cash declined by $34.9 million during the nine-month period. Investing cash outflow was $293.3 million, including $271.5 million for Aesynt; financing provided $235.2 million, principally from new borrowing.
Outlook, commentary, risks and unusual items
- Management expected 2016 revenue to increase compared with the corresponding 2015 periods, citing existing orders and prior and current bookings. This is not a quantified revenue or earnings forecast. Revenue conversion depends on customer orders, product supply, installation capacity, and customer acceptance timing.
- Management said cash, expected operating cash flows, employee equity-plan proceeds, and available credit were expected to meet requirements for at least the next 12 months. The credit agreement includes a maximum leverage ratio of 3.00:1 and minimum fixed-charge coverage ratio of 1.50:1.
- Aesynt was acquired for $271.5 million net of cash received. Since acquisition, Aesynt reported $119.9 million in revenue and $30.6 million in operating losses through September 30; the loss included $20.9 million of acquired-intangible amortization. The company recorded $6.4 million of Aesynt-related acquisition costs in the 2016 nine-month period.
- A North American sales and field-organization restructuring reduced headcount by 36 and incurred approximately $1.7 million in expense; the program was concluded by September 30.
- The company authorized an additional $50 million share-repurchase program in August. No shares were repurchased in the first nine months of 2016; $54.9 million remained available under the two programs at quarter-end.
- Material risks include successful Aesynt integration and retention of key personnel, debt service and covenant compliance, acquisition-related goodwill and intangible-asset impairment, healthcare-provider capital spending, competition, installation delays, supply availability, foreign exchange, and evolving regulation. Brexit was identified as a risk with uncertain effects.
- The MV Circuit patent dispute was settled and dismissed with prejudice; Omnicell assigned certain mobile-cart-related patents but retained rights to develop, manufacture, market, and sell its mobile cart product lines. The filing reported no legal-loss accrual for the described proceedings because a loss was considered reasonably possible but not probable and not reasonably estimable.
- Gross unrecognized tax benefits were $10.2 million; the company was under IRS examination for tax years 2011–2014. Management reported disclosure controls were effective and was integrating Aesynt into its systems and controls.
Important facts for investors to verify
- How much of reported growth reflects ongoing organic demand versus acquired revenue, and whether Aesynt integration delivers expected sales and operating benefits.
- Whether gross margins and operating profitability recover as acquisition-related purchase-accounting charges and amortization evolve.
- Bookings, installation pace, backlog conversion, accounts-receivable collections, and deferred revenue, which affect the timing and quality of revenue and cash generation.
- Debt repayment, interest-rate exposure, liquidity, and headroom against credit-agreement covenants.
- Potential acquisition-related impairment, tax exposures, and other contingencies, including the Avantec earn-out and unresolved uncertain tax positions.