Omnicell, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015; filed August 7, 2015. Omnicell provides healthcare medication and supply automation, analytics, and medication-adherence products and services. Results are unaudited.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $112.8 million | $105.1 million | $229.0 million | $206.8 million |
| Gross profit / margin | $57.5 million / 51% | $56.0 million / 54% | $119.1 million / 52% | $110.5 million / 53% |
| Operating income / margin | $12.4 million / 11% | $12.6 million / 12% | $22.8 million / 10% | $22.5 million / 11% |
| Net income | $8.8 million | $7.8 million | $15.1 million | $14.0 million |
| Diluted EPS | $0.24 | $0.21 | $0.41 | $0.38 |
- Q2 revenue grew 7% year over year; first-half revenue grew 11%. Product revenue increased 5% in Q2 and 9% in the first half; services and other revenue increased 19% and 17%, respectively.
- First-half revenue by segment was $181.5 million for Automation and Analytics, up 9%, and $47.5 million for Medication Adherence, up 17%. Segment operating income was $48.7 million and $3.7 million, respectively; Medication Adherence segment income fell from $5.8 million.
- Cash from operations was $10.2 million in the first half, versus $25.4 million a year earlier. Investing used $33.7 million and financing used $14.5 million; cash declined $37.9 million to $88.0 million.
- At June 30, cash was $88.0 million, working capital $147.0 million, and the current ratio 2.1:1. The company had no borrowings under its $75 million revolving facility and reported compliance with its covenants. It had no long-term borrowings.
- Total liabilities were $201.7 million and stockholders’ equity $399.3 million. Operating lease commitments were $42.2 million; purchase obligations were $25.2 million.
Material changes and unusual items
- In April, Omnicell acquired Mach4, a German robotics dispensing systems maker, and acquired the remaining 85% of UK distributor Avantec. The preliminary combined purchase price was $41.4 million, including contingent consideration; goodwill recognized was $26.1 million. Purchase allocations remained preliminary.
- The Avantec step acquisition generated a $3.4 million non-cash gain from revaluing Omnicell’s previously held 15% interest. The gain benefited reported operating income and should be distinguished from recurring operations.
- Q2 Automation and Analytics product revenue was flat, with management citing delayed installations; the acquired companies contributed approximately $2.9 million in product revenue and $1.3 million in service revenue during the quarter. First-half revenue also included acquisition contributions and Surgichem, acquired in 2014.
- Gross margin fell year over year, including reported declines in both segments. Management cited acquired-company mix, Medication Adherence production inefficiencies, higher scrap and overtime costs, and installation costs.
- Operating cash flow was pressured by a $27.7 million increase in receivables and a $9.6 million increase in inventory, partly offset by other working-capital movements. Investing outflows included $23.6 million for acquisitions, $6.1 million for software development, and $3.8 million for property and equipment.
- Omnicell repurchased approximately 680,000 shares for $25.0 million in the first half. The 2012 program was completed; $29.9 million remained under the 2014 program at June 30.
Outlook, risks, and contingencies
- Management expected 2015 revenue to increase from 2014, citing existing orders and bookings; revenue conversion depends in part on completing customer installations on schedule. Management intended to manage 2015 operating margins at levels similar to 2014.
- Management expected R&D to rise to approximately 8% of revenue in 2015, from approximately 6% in 2014, while SG&A as a percentage of revenue was expected to remain stable. It did not anticipate significant gross-margin fluctuations beyond normal product-mix effects.
- Key execution risks include installation delays, customer capital-budget decisions, product and service quality, supply availability, acquisition integration, international expansion and foreign-exchange movements. International sales were 14% of revenue in both Q2 and the first half, compared with 10% in the corresponding 2014 periods.
- The company said existing cash, expected operating cash flows and available credit should meet needs for at least the next 12 months. The $75 million facility was undrawn at quarter-end; the 2014 repurchase authorization and possible Avantec earn-outs remain potential uses of cash.
- In a patent inventorship and related fraud case, several claims survived a motion to dismiss and discovery was ordered. The company recorded no legal accrual, stating a loss was reasonably possible but not probable and that a loss range could not be estimated. A separate putative securities class action was voluntarily dismissed without prejudice in May 2015.
- A whistleblower allegation concerning a customer “side letter” prompted an internal investigation and delayed the 2014 Form 10-K. Omnicell said the investigation was concluded, no financial-statement changes were required, and effective internal control over financial reporting was maintained. Q2 controls and procedures were reported effective.
Important facts for investors to verify
- Whether delayed installations convert to recognized revenue as expected, and how bookings and backlog develop.
- Whether receivables and inventory growth reverse into operating cash, and whether margins recover as acquisition and production costs are absorbed.
- Final purchase accounting, acquisition integration results, and the timing and amount of Avantec earn-out and other purchase-related payments.
- Developments in the patent litigation and any follow-up to the whistleblower investigation or prior filing delay.
- Use of remaining repurchase authorization and credit-facility capacity, alongside contractual commitments and liquidity needs.