Omnicell, Inc. — Q2 2017 Form 10-Q
Business context and reporting period. Omnicell supplies medication and supply automation, analytics, and medication-adherence products and services to healthcare customers. This unaudited filing covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. Results include acquisitions of Aesynt and Ateb (2016) and InPharmics (April 2017).
Key financial results
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $180.9 | $172.9 | $331.4 | $343.9 |
| Gross profit / margin | $78.0 / 43% | $78.0 / 45% | $142.2 / 43% | $158.0 / 46% |
| Operating income (loss) | $(2.4) | $(0.1) | $(19.6) | $1.7 |
| Net income (loss) | $0.8 | $(1.2) | $(9.9) | $(1.5) |
| Diluted EPS | $0.02 | $(0.03) | $(0.27) | $(0.04) |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $38.9 | $16.9 |
- Q2 revenue rose 5%; product revenue declined 2% to $128.1 million, while services and other revenue increased 25% to $52.8 million. For the half-year, revenue fell 4%: product revenue declined 12% to $227.0 million, partly offset by 22% growth in services and other revenue to $104.5 million.
- Q2 gross profit was essentially unchanged, but gross margin narrowed to 43% from 45%. First-half gross profit fell 10%, and margin declined to 43% from 46%. Management attributed pressure principally to XT Series manufacturing ramp-up and product-revenue timing.
- Q2 research and development expense increased 23% to $16.9 million; total operating expenses rose 3% to $80.4 million. First-half operating expenses rose 4% to $161.8 million, including higher R&D spending and acquisition-related costs.
- At June 30, cash and cash equivalents were $26.9 million, down from $54.5 million at December 31, 2016. Working capital was $84.3 million, versus $134.5 million; the current ratio was 1.4:1, versus 1.7:1.
- Six-month investing cash use was $17.8 million, including $6.5 million for property and equipment, $6.7 million for software development and $4.4 million for InPharmics. Financing cash use was $47.4 million, chiefly reflecting $70.5 million of debt repayments.
- Debt at June 30 was $200.0 million before deferred issuance costs ($194.4 million net): $187.5 million term debt and $12.5 million revolver borrowings. The company repaid $70.5 million during the half-year and reported covenant compliance at quarter-end. After quarter-end, it borrowed another $15 million on July 7 and $12 million on July 31.
Material changes versus prior period
- Automation and Analytics revenue decreased 8% to $272.6 million for the first half, as product revenue conversion slowed during the XT Series transition. Medication Adherence revenue grew 27% to $58.8 million, supported by Ateb and VBM products; however, the segment reported a $2.2 million operating loss versus $4.5 million operating income a year earlier.
- Service revenue growth reflects a larger installed base, higher renewal fees and Ateb contributions. Product revenue timing was affected by customer order conversions and installation schedules.
- The company recorded $4.4 million of restructuring expense in the first half. Its plan targets approximately 100 job reductions and closure of its Nashville and Slovenia facilities; expected total cost was $4.9 million.
- Cash from operations increased to $38.9 million from $16.9 million, supported in part by a $23.4 million increase in accounts payable and other working-capital movements. Inventory rose $12.2 million, including buildup for forecast XT Series sales.
Outlook, risks and unusual items
- Management expected 2017 revenue to increase from 2016 and said it intended to manage toward operating profit margins similar to those achieved in 2016. It cited execution, bookings, installations and timely customer acceptance as important drivers; no specific revenue or earnings guidance range is provided in the filing text.
- Management said existing cash, anticipated operating cash flow, employee equity-plan proceeds and available credit were expected to meet cash needs for at least the next 12 months. The subsequent $27 million in revolver borrowings is relevant context for this liquidity assessment.
- Key execution risks include XT Series manufacturing ramp-up and quality, slower conversion of bookings and backlog into installed revenue, installation capacity and timing, and the ability to realize benefits from acquisitions and restructuring. The filing also discusses competition, customer capital-spending constraints, supplier concentration, cybersecurity/privacy, regulatory, foreign-exchange and integration risks.
- The company had $200 million of debt, a $400 million secured credit facility, and financial covenants requiring a maximum leverage ratio of 3.00:1 and minimum fixed-charge coverage of 1.50:1. It reported compliance at June 30. A $100 million interest-rate swap reduced rate exposure on part of the debt; $100 million remained exposed, and a 1% rate increase was estimated to add $1.0 million of annual interest expense.
- Non-cancelable purchase commitments were $60.9 million, primarily payable within 12 months; operating lease commitments totaled $83.4 million. 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.
- Adoption of share-based compensation guidance produced a $1.6 million cumulative adjustment to retained earnings and tax benefits recognized through income tax expense. The company was evaluating the new revenue standard, effective for it in 2018; it expected changes involving term software licenses, contingent revenue and commission expense, but had not quantified the financial impact.
Important facts for investors to verify
- Whether XT Series orders convert to installations and recognized product revenue on the expected schedule, and whether manufacturing quality and gross margins improve.
- How much of first-half operating cash flow reflects sustainable operations versus working-capital timing, particularly accounts payable, inventory and deferred revenue.
- Liquidity after the $27 million of post-quarter-end revolver borrowings, including remaining facility availability and covenant headroom.
- Progress and final costs of the workforce and facility restructuring, and whether management achieves its stated margin objective.
- The eventual quantified effect and transition approach for the 2018 revenue-recognition standard, along with integration and impairment risks related to acquired businesses and intangible assets.