Omnicell, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; comparisons are to the same 2016 periods unless otherwise noted. Omnicell supplies healthcare automation, analytics, medication-adherence products and related services. Its reportable segments are Automation and Analytics and Medication Adherence.
Key financial results
Amounts in millions, except per-share data and percentages.
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $186.8 | $176.7 | $518.2 | $520.6 |
| Gross profit / margin | $84.9 / 45% | $81.5 / 46% | $227.0 / 44% | $239.5 / 46% |
| Operating income (loss) / margin | $9.7 / 5% | $4.9 / 3% | $(9.9) / (2)% | $6.7 / 1% |
| Net income (loss) | $6.2 | $2.0 | $(3.7) | $0.4 |
| Diluted earnings (loss) per share | $0.16 | $0.05 | $(0.10) | $0.01 |
| Operating cash flow | Not separately presented for the quarter | $20.6 | $26.0 |
- Revenue mix: Q3 product revenue was $135.1 million, up 1%; services and other revenue was $51.7 million, up 20%. For nine months, product revenue fell 8% to $362.1 million, while services grew 22% to $156.1 million.
- Segment revenue: Q3 Automation and Analytics revenue was $154.7 million, up 1.5%; Medication Adherence was $32.1 million, up 32%. Nine-month revenue was $427.3 million for Automation and Analytics, down 5%, and $91.0 million for Medication Adherence, up 29%.
- Balance sheet and liquidity: At September 30, cash was $7.5 million, working capital $109.5 million, and the current ratio 1.5:1. Cash was $54.5 million and working capital $134.5 million at December 31, 2016.
- Debt: Gross borrowings under the credit facilities were $197.5 million ($185.0 million term loan and $12.5 million revolving borrowings); carrying debt net of issuance costs was $192.3 million. Omnicell repaid $100.0 million during the nine-month period and reported compliance with debt covenants.
- Cash movement: Nine-month investing cash use was $24.1 million and financing cash use was $42.1 million; cash decreased by $47.0 million. Operating cash flow was affected by increased receivables and inventory, partly offset by higher accounts payable.
Material changes versus prior periods
- Q3 revenue increased 6%, with higher service revenue and Medication Adherence sales. Nine-month revenue was nearly flat, down $2.4 million.
- Management attributed weaker nine-month Automation and Analytics product revenue to slower conversion of bookings and backlog following the XT Series launch. Administrative work converting existing G4 bookings to XT products also delayed revenue recognition. Manufacturing ramp-up and addressing quality concerns contributed to costs.
- Medication Adherence growth reflected the VBM product line and the acquisition of Ateb in December 2016. Ateb contributed $15.5 million of nine-month service revenue.
- Nine-month operating results moved to a loss, primarily reflecting lower Automation and Analytics gross profit and increased operating expenses, including acquired Ateb costs. Q3 operating income improved as revenue rose and corporate expenses declined.
- Omnicell acquired InPharmics in April 2017 for $5.0 million net of cash acquired. The 2016 comparison includes Aesynt, acquired in January 2016, for only part of that year.
Outlook, commentary and risks
- Management said it intended to manage the business in 2017 to operating profit margins similar to those achieved in 2016; it did not provide a specific revenue or earnings forecast in the supplied filing text.
- Management expected available cash, operating cash flows and funds available under the credit facilities to meet needs for at least the next 12 months. It also expected future cash uses for working capital, capital expenditures, debt service and potential acquisitions.
- In October 2017, after quarter-end, Omnicell drew an additional $22.0 million on its revolver ($12.0 million on October 2 and $10.0 million on October 10).
- A workforce and facility restructuring announced in February targeted approximately 100 employees and closure of the Nashville and Slovenia facilities. Nine-month restructuring expense was $4.3 million; management expected the plan to be completed in 2017.
- ASU 2014-09 revenue recognition was scheduled to take effect January 1, 2018. Omnicell was assessing historical contracts and expected notable effects for term software licenses, contingent revenue and commission expense; it was considering full retrospective adoption but had not finalized its approach.
- Key risks include delayed installations and XT Series conversion, product quality or manufacturing issues, integration of acquisitions, healthcare customers’ capital budgets, competition, supplier dependence, debt and covenant constraints, and foreign-exchange exposure. A 1% interest-rate increase was estimated to add $1.0 million of annual interest expense on the $100.0 million of debt exposed to rate changes, after the effect of swaps.
- Legal proceedings were described as reasonably possible but not probable losses; no accrual was recorded and a possible loss range could not be reasonably estimated. Management said no pending matter was believed to have a material impact on financial position or results.
Important facts for investors to verify
- Whether XT Series bookings convert to installations and recognized product revenue on schedule, and whether manufacturing or quality issues persist.
- Whether service growth and Medication Adherence gains can offset continued weakness or margin pressure in Automation and Analytics.
- Cash generation and working-capital trends, particularly receivables and inventory, given the decline in cash and additional post-quarter revolver borrowing.
- Debt repayment capacity, remaining revolver availability, and continued compliance with leverage and fixed-charge covenants.
- The eventual quantified impact and transition method for the 2018 revenue-recognition standard, along with restructuring completion and any material developments in legal or tax contingencies.