Omnicell, Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Omnicell sells medication and supply automation systems, related software and services, and medication-adherence packaging products. In 2014, it reorganized reporting into Automation and Analytics and Medication Adherence segments; prior-period segment figures were recast.
Financial performance
Amounts in millions, except per-share data and percentages.
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $101.8 | $87.1 | +16.8% |
| Gross profit / margin | $54.5 / 53.6% | $45.4 / 52.1% | Margin +1.5 pts |
| Operating income / margin | $10.0 / 9.8% | $4.2 / 4.8% | Improved |
| Net income | $6.2 | $3.4 | +83% |
| Diluted EPS | $0.17 | $0.10 | +$0.07 |
| Operating cash flow | $1.1 | $4.1 | Down $3.0 |
| Investing cash flow | $(5.6) | $(5.2) | — |
| Cash and equivalents, March 31 | $107.6 | $69.8 | Up from $104.5 at year-end 2013 |
- Product revenue was $82.6 million, up 19.3%; services and other revenue was $19.2 million, up 7.3%. Revenue growth primarily reflected more automation-system installations and, to a lesser extent, higher Medication Adherence consumables.
- Automation and Analytics revenue was $81.5 million, up 18.6%, with a 57.1% gross margin and $9.2 million operating income. Medication Adherence revenue was $20.3 million, up 10.2%, with a 39.2% gross margin and $0.8 million operating income; the comparable 2013 segment operating loss was $1.2 million.
- R&D expense declined 23% to $6.1 million, partly because Q1 2013 included a $1.8 million software-development write-off. SG&A increased 15.5% to $38.4 million, including higher commissions, staffing and compensation, and professional fees.
- Operating cash flow was affected by higher receivables and payment of accrued incentive compensation, partly offset by higher accounts payable and net income. Capital spending and capitalized software development contributed to investing outflows.
Balance sheet, debt and liquidity
- At March 31, 2014, total assets were $510.4 million and total liabilities were $145.2 million. Current assets were $250.8 million versus current liabilities of $92.1 million.
- The company reported no borrowings under its $75 million revolving credit facility, which matures in 2018; it was compliant with financial covenants. The facility may support general corporate needs, including acquisitions.
- Management said cash, expected operating cash flows, employee-plan proceeds and available credit should meet working-capital, capital-expenditure, acquisition and other needs for at least 12 months.
- Contractual obligations included $40.6 million in operating leases and $9.7 million in supplier and contract-manufacturer commitments. A $5.2 million uncertain-tax-position liability was excluded because payment timing and amount could not be estimated.
Outlook, commentary and risks
- Management expected 2014 revenue to increase year over year as existing orders were fulfilled, and intended to manage 2014 operating margins at levels similar to 2013. It expected R&D and SG&A to remain relatively flat as percentages of revenue while growing in dollars. The filing gives no quantified revenue or earnings guidance.
- Management cited strong prior-year bookings, competitive conversions, upgrades to the G4 platform, and sales into non-acute-care facilities as drivers of Automation and Analytics installations. It attributed Medication Adherence margin improvement mainly to a shift toward higher-value products.
- Revenue and quarterly results depend on customer orders, installation schedules and acceptance, product mix, and the ability to deliver consumables on time. Management noted Q1 revenue declined 3.8% sequentially from Q4 2013, largely due to lower product revenue.
- Principal disclosed risks include healthcare-provider capital-budget constraints and regulatory uncertainty; intense competition; lengthy sales and installation cycles; reliance on suppliers and timely production of medication packages; product, software, privacy and cybersecurity issues; interoperability and system-upgrade execution; and acquisition integration.
- A putative class action relating to a stolen device containing patient information was dismissed without prejudice in December 2013; the plaintiff did not appeal by the deadline. Omnicell recorded no liability, stating a loss was reasonably possible but not probable. The filing cautions that litigation outcomes remain uncertain.
- A potential acquisition of UK medication-adherence provider Surgichem was announced but not completed as of the filing. Omnicell also reported no goodwill impairment indicators during the quarter.
Important facts for investors to verify
- Whether installation timing, order conversion and customer acceptance support the expected 2014 revenue growth.
- Whether receivables and operating cash flow improve after the quarter’s working-capital outflow.
- Whether gross-margin gains persist, particularly in Medication Adherence, and how higher SG&A affects operating margins.
- The status and terms of the proposed Surgichem acquisition, if pursued, and its financing and integration implications.
- Developments in the dismissed privacy-related litigation and any related compliance, customer or reputational consequences.