Omnicell, Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Omnicell supplies automated medication and medical-supply management systems, related software and services, and medication-adherence packaging products. This unaudited quarterly filing covers the three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Amounts below are in millions of dollars except per-share data.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $105.1 | $93.7 | $206.8 | $180.8 |
| Gross profit / margin | $56.0 / 53.3% | $49.4 / 52.7% | $110.5 / 53.4% | $94.7 / 52.4% |
| Operating income / margin | $12.6 / 12.0% | $9.4 / 10.0% | $22.5 / 10.9% | $13.5 / 7.5% |
| Net income | $7.8 | $6.0 | $14.0 | $9.4 |
| Diluted earnings per share | $0.21 | $0.17 | $0.38 | $0.27 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $25.4 | $21.2 |
- Q2 revenue rose 12.1% year over year; six-month revenue rose 14.4%. Product revenue drove most growth, increasing 12.8% in Q2 and 15.9% for the six-month period.
- Q2 net income increased about 29% year over year. Six-month net income increased about 49%; the prior-year period included a $1.8 million software-development impairment charge.
- Six-month investing cash outflow was $13.0 million, primarily for property and equipment ($7.3 million) and capitalized software development ($5.5 million). Financing cash inflow was $9.3 million. Cash increased $21.8 million to $126.4 million.
- At June 30, cash was $126.4 million, current assets $275.9 million and current liabilities $103.3 million, implying working capital of approximately $172.6 million. Total liabilities were $159.6 million; the filing reports no borrowings under its credit facility.
Material changes and segment performance
- Management reorganized reporting in Q1 2014 from customer-based segments to product-based segments: Automation and Analytics, and Medication Adherence; prior-year segment figures were recast.
- Automation and Analytics revenue grew 14.7% in Q2 and 16.6% for six months. Its Q2 operating margin rose to 14.4% from 11.0%; six-month margin was 12.9% versus 9.4%. Growth reflected customer installations, G4 upgrades and service revenue. Hospital installations increased to 1,886 from 1,783 year over year.
- Medication Adherence revenue grew 2.7% in Q2 and 6.3% for six months. Q2 operating margin declined to 1.7% from 6.2%, reflecting production ramp-up costs and product mix; six-month margin improved to 2.8% from 0.2%.
- Accounts receivable rose to $82.6 million from $58.6 million at year-end, partly reflecting higher shipments and billings. Deferred gross profit increased to $30.7 million from $20.0 million, primarily for shipped systems not yet installed; installation timing affects revenue recognition.
Outlook, risks and contingencies
- Management expected 2014 revenue to increase versus 2013 as existing orders are fulfilled and intended to manage the remainder of 2014 to operating profit margins similar to the first half. Revenue and margin guidance ranges were not provided.
- Management said cash, expected operating cash flows and the available revolving facility should cover working capital, capital expenditures, potential acquisitions and other obligations for at least the next 12 months. The $75 million facility, maturing in 2018, was undrawn; the company reported compliance with its covenants.
- Key execution risks include customer capital-budget constraints, lengthy sales cycles and installation delays, which can defer equipment revenue; competition and pricing pressure; dependence on suppliers and timely consumables production; international expansion; product quality, software and interoperability; and acquisition integration.
- The company had an announced but not completed agreement to acquire UK medication-adherence provider Surgichem. The filing does not state that the transaction had closed.
- Operating lease commitments totaled $39.0 million and supplier/contract-manufacturer commitments $11.3 million. A $5.8 million uncertain-tax-position liability was excluded from the contractual-obligations table because payment timing and amount could not be estimated.
- Management reported no legal proceedings believed likely to have a material financial impact. A previously disclosed privacy-related class action was dismissed without prejudice; the plaintiff did not appeal by the deadline. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether installation capacity and customer schedules convert the elevated shipped-but-not-installed balance into revenue on time.
- Whether Automation and Analytics growth and margins persist, and whether Medication Adherence can recover from Q2 margin pressure.
- Whether the increase in receivables converts to cash; six-month operating cash flow benefited from higher deferred gross profit and other working-capital movements.
- The status and financial terms of the proposed Surgichem acquisition, and any related integration or funding implications.
- Progress on ERP-system upgrades and preparation for the new revenue-recognition standard, which the company said would become effective for it in Q1 2017 and was still evaluating.
- Exposure to installation, supplier, privacy, product-liability, tax and credit-agreement covenant risks, including the $12.0 million balance of unsold leases to U.S. government customers.