Omnicell, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013. Omnicell sells medication and supply automation solutions, serving hospitals through Acute Care and pharmacies and other non-hospital customers through Non-Acute Care. The Non-Acute Care segment includes MTS, acquired in May 2012.
Financial performance and position
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Revenue | $93.7 million | $75.4 million | $180.8 million | $139.5 million |
| Gross profit | $49.4 million | $39.4 million | $94.7 million | $75.1 million |
| Gross margin | 52.7% | 52.2% | 52.4% | 53.9% |
| Operating income | $9.4 million | $2.4 million | $13.5 million | $6.1 million |
| Net income | $6.0 million | $1.4 million | $9.4 million | $3.7 million |
| Diluted EPS | $0.17 | $0.04 | $0.27 | $0.11 |
- Q2 revenue increased 24.3% year over year; six-month revenue increased 29.6%. Product revenue grew 27.5% and 34.3%, respectively; services and other revenue grew 12.3% and 13.4%.
- Q2 operating margin was 10.0%, versus 3.2% a year earlier; six-month operating margin was 7.5%, versus 4.4%. Six-month gross margin declined year over year, reflecting product mix and the larger contribution from Non-Acute Care.
- At June 30, cash and cash equivalents were $87.3 million, up from $62.3 million at year-end 2012. Current assets were $213.2 million and current liabilities $88.5 million. Total liabilities were $138.4 million; the balance sheet presents no debt balance.
- Six-month operating cash flow was $21.2 million, compared with $18.8 million. Investing activities used $9.0 million, primarily for capital expenditures and software development; financing provided $12.8 million, largely from employee equity plans. Cash increased $25.0 million.
- Capital expenditures were $5.7 million and capitalized software development was $3.2 million for the six months. The company stated that available cash and operating cash flows should cover anticipated working capital and capital expenditure needs for at least 12 months.
- Acute Care generated $68.1 million of Q2 revenue and $7.1 million of operating income; Non-Acute Care generated $25.6 million and $2.3 million, respectively.
Changes versus comparable periods
- Comparisons are affected by the MTS acquisition: 2013 includes the full quarter and half-year, while 2012 includes MTS only from May 21, 2012. Much of the reported growth therefore reflects acquisition-related consolidation rather than solely organic growth.
- Q2 product and service gross margins were 52.0% and 55.6%, respectively. For the first six months, product gross margin was 51.8%, down from 54.6%; service gross margin improved to 54.9% from 51.1%.
- Operating expenses rose 8.3% in Q2 and 17.6% for the half-year, but declined as a share of revenue. Prior-year Q2 SG&A included $3.2 million of MTS acquisition costs.
- Cash from operations improved, though higher accounts receivable was a significant use of operating cash. The year-over-year reduction in investing cash outflow mainly reflects the prior-year MTS acquisition payment.
Outlook, risks and unusual items
- Management expected revenue to continue increasing in 2013 compared with 2012, citing existing orders, installations, the installed base and the full-year contribution from MTS. No specific full-year revenue or earnings guidance was provided.
- Management expected R&D spending to remain relatively flat as a percentage of revenue and grow in dollars; SG&A was expected to grow modestly, with efficiencies limiting growth relative to revenue.
- A Non-Acute Care reorganization incurred $0.7 million of severance and related expense and $0.4 million of accelerated stock-option vesting expense in Q1. Management said it was intended to strengthen integration, customer focus and future growth.
- The company wrote off $1.8 million of capitalized software development costs in Q1 after changing the product roadmap and reassessing project viability. The charge was recorded in R&D.
- A putative class action relates to a stolen device containing medication-dispensing logs and certain patient health information. Omnicell reported that it had recorded no accrual because a loss was considered reasonably possible but not probable; the possible loss range could not be estimated. The company intended to defend the matter.
- Other material risks include customer delays in capital spending or installations, competitive pressure, supplier dependence, timely production of medication packaging consumables, acquisition integration, privacy and cybersecurity exposure, and healthcare regulation. Contractual obligations included $44.5 million of operating lease payments and $8.0 million of near-term supplier and contract-manufacturer commitments. Uncertain tax positions of $4.4 million were recorded, with payment timing and amount not estimable.
Important facts for investors to verify
- How much of reported revenue growth reflects MTS consolidation versus comparable, organic growth, and whether MTS margins improve.
- Whether the six-month decline in product gross margin persists and how product mix and installation timing affect quarterly results.
- Whether operating cash generation converts to earnings as receivables and deferred gross profit change.
- Updates on the patient-information incident, related litigation, and any potential customer, regulatory, indemnification or financial consequences.
- Progress and costs associated with the Non-Acute Care reorganization and redesigned software project.
- Whether customer budgets, installation schedules, supplier availability and other stated risks affect management’s 2013 growth expectations.