Omnicell, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Omnicell provides medication and supply automation, analytics, and medication-adherence products and services to healthcare customers. The quarter includes Aesynt’s results from its January 5, 2016 acquisition; prior-year results do not.
Financial performance
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $171.0 million | $116.2 million |
| Gross profit / margin | $79.9 million / 46.7% | $61.7 million / 53.1% |
| Operating income / margin | $1.9 million / 1.1% | $10.4 million / 8.9% |
| Net income (loss) | ($0.4) million | $6.3 million |
| Diluted EPS | ($0.01) | $0.17 |
| Operating cash flow | $21.8 million | $11.3 million |
| Investing cash flow | ($279.9) million | ($4.1) million |
| Financing cash flow | $229.0 million | $6.6 million |
Revenue increased 47%. Product revenue rose 36% to $127.9 million; services and other revenue rose 95% to $43.1 million. Automation and Analytics revenue was $148.9 million, up 61%; Medication Adherence revenue was $22.1 million, down 6%. International sales were 16% of revenue.
Gross margin fell to 46.7% from 53.1%, and operating margin declined to 1.1% from 8.9%. Management attributed margin pressure to lower-margin product mix and acquired-business margins, including purchase-accounting effects from inventory step-up, deferred revenue, and acquired intangible amortization. Operating expenses increased 52% to $78.1 million, including acquisition-related costs.
Financial position and liquidity
At March 31, 2016, cash and cash equivalents were $53.5 million, down from $82.2 million at year-end; working capital was $110.7 million versus $139.5 million, and the current ratio was 1.6 versus 2.1. The decline in cash reflected primarily the Aesynt acquisition, partly financed with new debt.
Debt had a net carrying value of approximately $227.4 million, comprising a $200 million term loan and $35 million drawn on the $200 million revolver, net of unamortized issuance costs. The company reported $236.5 million of facility borrowings including accrued interest. The secured facility matures in 2021, carries variable rates, and includes leverage and fixed-charge-coverage covenants. Omnicell reported compliance at quarter-end. Operating cash flow included a $12.7 million increase in deferred revenue; working-capital movements also included higher inventory and investment in sales-type leases.
Material changes, outlook, and risks
- Aesynt acquisition: Completed for $271.5 million net of acquired cash. Preliminary purchase accounting recorded $164.8 million of goodwill and $123.7 million of identifiable intangibles. Aesynt contributed $43.2 million of revenue and a $9.5 million operating loss from acquisition through quarter-end. Integration and realization of expected benefits remain important execution risks.
- Management outlook: Omnicell expected 2016 revenue to increase versus 2015, citing existing orders and bookings, and planned to manage to operating profit margins similar to 2015. No specific numerical revenue or earnings guidance was provided in the filing. Revenue timing depends in part on customer installation schedules and acceptance.
- Subsequent restructuring: In Q2, North American sales and field teams were integrated, reducing headcount by 34; approximately $1.5 million of restructuring charges were expected.
- Legal contingency: A patent-inventorship and related state-law case remained pending. The company recorded no accrual, stating a loss was reasonably possible but not probable and that a loss range could not be reasonably estimated.
- Other exposures: Risks include acquisition integration and retention, debt service and covenant compliance, healthcare capital-spending cycles, competition, installation delays, foreign exchange, cybersecurity and privacy, and regulatory requirements. The filing also notes an IRS examination for 2011–2013; gross unrecognized tax benefits were $9.9 million.
- Controls: Management concluded disclosure controls were effective at the reasonable-assurance level. Aesynt was still being integrated into the company’s systems and control environment.
Investor facts to verify
- Whether Aesynt integration delivers expected sales, cost efficiencies, and customer retention, and how its operating losses develop.
- Whether margins recover as acquisition-related purchase-accounting effects and integration costs change.
- Debt balances, variable-rate exposure, covenant headroom, and cash generation after acquisition financing.
- Revenue conversion from bookings and deferred revenue, including the timing of customer installations and acceptance.
- Developments in the pending patent litigation, IRS examination, and the planned Q2 restructuring charges.