Omnicell, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Omnicell provides medication and supply automation, analytics, and medication-adherence products and services to healthcare customers. Figures below are in millions of dollars except per-share data and ratios.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / prior date |
|---|---|---|
| Revenue | $150.6 | $171.0 |
| Gross profit / margin | $64.2 / 43% | $79.9 / 51% |
| Operating income (loss) | $(17.2) | $1.9 |
| Net income (loss) | $(10.8) | $(0.4) |
| Diluted loss per share | $(0.29) | $(0.01) |
| Operating cash flow | $28.2 | $22.0 |
| Cash and cash equivalents | $46.3 | $54.5 at Dec. 31, 2016 |
| Working capital | $96.9 | $134.5 at Dec. 31, 2016 |
| Total debt before unamortized issuance costs | $220.5 | $260.5 at Dec. 31, 2016 |
Current assets were $294.4 million and current liabilities $197.5 million at quarter-end; the current ratio was 1.5, down from 1.7 at year-end. Debt consisted of $190.0 million of term loans and $30.5 million drawn on the revolver. The company repaid $40.0 million of debt during the quarter. It reported compliance with credit covenants.
Operating cash flow benefited in part from lower receivables ($18.9 million cash inflow) and higher payables ($11.1 million inflow); inventory growth used $6.9 million. Investing activities used $6.8 million, primarily for property and equipment and software development. Financing activities used $30.1 million, mainly for debt repayment. Cash declined by $8.1 million during the quarter.
Material changes versus Q1 2016
- Revenue decreased 12%. Product revenue fell 23% to $98.9 million; services and other revenue rose 20% to $51.6 million.
- Automation and Analytics revenue fell 17% to $124.2 million, primarily because conversion of bookings and backlog to revenue slowed after the XT Series launch. Medication Adherence revenue increased 20% to $26.4 million, principally reflecting Ateb service revenue.
- Gross margin declined to 43% from 51%. Management cited product mix and lower product revenue; restructuring costs partly offset the benefit of lower acquired-intangible amortization.
- Research and development expense rose 21% to $16.8 million. Total operating expenses increased 4% to $81.4 million, while operating results moved from income to loss.
- International revenue represented 12% of total revenue versus 16% in the prior-year quarter. No customer accounted for more than 10% of total revenue.
Outlook, commentary, risks and unusual items
- Management anticipated revenue growth in 2017 versus 2016, citing execution, existing orders and expected booking growth. It also intended to manage operating profit margins at levels similar to 2016. No numerical revenue or earnings guidance was provided.
- Management attributed the near-term revenue conversion slowdown to the XT Series transition, including administrative conversion of existing G4 bookings and customer installation timing. It noted larger deal sizes and positive initial XT customer response, while warning that adoption and timing remain uncertain.
- On February 15, the company announced a plan to reduce its workforce by approximately 100 employees and close facilities in Nashville, Tennessee, and Slovenia as it establishes product-development, engineering and manufacturing Centers of Excellence. The estimated total restructuring cost is $6.5 million. It accrued $3.8 million and paid $2.1 million in Q1.
- On April 19, 2017, Omnicell announced its $5.3 million cash acquisition of InPharmics, a pharmacy informatics company. On April 11, it amended its credit agreement, increasing annual capital-expenditure limits from $35 million to $45 million and the limit for certain non-permitted investments from $10 million to $20 million.
- The Q1 tax provision was a benefit of $8.9 million. Adoption of share-based compensation guidance contributed $0.8 million of excess tax benefits and improved loss per share by $0.02; the adoption also produced a $1.6 million cumulative adjustment to retained earnings. The filing’s MD&A contains an apparent accounting-standard reference inconsistency (it says “ASU 2019-16”; the accounting note describes adoption of ASU 2016-09).
- Principal risks discussed include delayed product installations or XT adoption, healthcare customers’ capital-spending decisions, acquisition integration, competition, supply constraints, international and foreign-exchange exposure, cybersecurity and privacy, and debt covenant and repayment obligations. A 1% interest-rate increase was estimated to add about $1.2 million in annual interest expense on debt exposed to rate fluctuations.
- The company reported ongoing legal proceedings but no accrual, stating that potential losses were reasonably possible but not probable and that a loss range could not be reasonably estimated. It also had $55.6 million of non-cancelable purchase commitments expected to be paid within 12 months.
Important facts for investors to verify
- Whether XT Series bookings convert into installations and recognized product revenue on management’s expected timeline.
- Whether revenue growth and operating margins recover toward management’s stated 2017 objectives, given Q1’s lower gross margin and operating loss.
- How the restructuring and Centers of Excellence affect costs, execution, staffing and customer support, including total realized charges versus the $6.5 million estimate.
- Debt repayment capacity, covenant headroom and liquidity as working capital declined and cash was used to repay debt.
- Integration progress and financial contribution from Aesynt, Ateb and InPharmics, and any acquisition-related costs or impairments.
- The eventual effect and transition method for the revenue-recognition standard expected to take effect in 2018; the company was still assessing contract and commission impacts.
- Developments in legal matters, uncertain tax positions and customer, supplier or regulatory risks that could materially affect results.