Omnicell, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Omnicell sells automated medication and medical-supply management systems and related services, primarily to U.S. hospitals. Results are unaudited.
Financial performance and liquidity
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $64.4m | $56.3m | $182.6m | $165.1m |
| Product revenue | $49.8m | $43.2m | $138.6m | $127.6m |
| Services and other revenue | $14.6m | $13.0m | $44.0m | $37.6m |
| Gross profit / margin | $34.4m / 53.4% | $30.1m / 53.5% | $99.9m / 54.7% | $86.6m / 52.4% |
| Operating income / margin | $4.8m / 7.4% | $3.0m / 5.4% | $10.1m / 5.5% | $8.0m / 4.9% |
| Net income | $3.0m | $1.3m | $6.3m | $4.2m |
| Diluted earnings per share | $0.09 | $0.04 | $0.18 | $0.13 |
- Revenue increased 14.5% year over year in Q3 and 10.6% for the nine-month period. Product revenue growth reflected installations, including sales of the G4 platform; services growth reflected a larger installed base.
- Q3 operating expenses were $29.7m, up 9.4%; selling, general and administrative expense rose 19.1% to $23.6m. Nine-month operating expenses rose 14.4% to $89.9m.
- Cash provided by operations for the nine months was $14.6m, versus $10.6m. Investing used $10.4m, including $6.8m of property and equipment purchases and $3.5m of capitalized software development. Financing used $0.4m, including $10.6m for share repurchases, offset in part by employee equity-plan proceeds and related tax benefits.
- Cash and cash equivalents were $179.3m and short-term investments were $8.1m at September 30, 2011, totaling $187.4m. Current assets were $280.7m and current liabilities $61.1m. The balance sheet reports no borrowings or debt balance; the filing states there were no long-term investments.
- Total liabilities were $80.5m and stockholders’ equity $278.0m. Inventory increased to $17.1m from $9.8m at December 31, 2010.
Material changes and unusual items
- Compared with Q3 2010, net income more than doubled, while gross margin was essentially flat. For the nine months, gross margin improved to 54.7% from 52.4% and operating income rose to $10.1m from $8.0m.
- Q3 margins declined sequentially from Q2 2011: total gross margin was 53.5% versus 55.4%; product margin was 55.0% versus 57.3%. Management attributed pressure to higher initial G4 console production costs and inventory carried during the transition. Most production had shifted to China; management expected product margins to improve as higher-cost California production was used up.
- Prior-year comparisons include $1.2m of restructuring and asset-impairment charges in 2010, which did not recur in 2011. Q3 2010 SG&A also benefited from a $2.4m release of excess liability related to an earlier Flo litigation settlement.
- Omnicell accrued and paid a $1.0m Medacist litigation settlement in 2011 for a perpetual patent license and dismissal of pending claims. A further $0.5m license-transfer fee is payable if specified change-in-control conditions occur.
- During the first nine months, Omnicell repurchased 741,959 shares for $10.6m at an average $14.23 per share. $14.4m remained authorized for repurchases at September 30.
Outlook, risks and contingencies
- Management expected 2011 revenue to increase approximately 10% versus 2010, service gross profit to remain consistent for the rest of 2011, and SG&A to remain consistent in absolute dollars. It expected gross R&D spending to increase over time, while amounts expensed may vary with software-development capitalization. These are management expectations, not guarantees.
- Management said cash and operating cash flows should cover anticipated working capital and capital expenditures for at least the next 12 months. It cited customer installation schedules, order levels, installation capacity, product competitiveness and customer budgets as important drivers of results.
- In October 2011, after quarter-end, Omnicell signed a lease for approximately 100,000 square feet in Mountain View. The 10-year lease is expected to begin in November 2012 and has an approximately $40.0m base commitment, with two optional five-year extensions at market rates.
- A material weakness in income-tax accounting controls remained unresolved; management concluded disclosure controls were not effective as of September 30. Remediation included enhanced consultant review, a search for a Senior Tax Manager and tax software implementation. Management nevertheless stated it believed the reported financial statements fairly presented the company’s position and results.
- Key risks include delayed customer installations and revenue recognition, pressure on hospital capital budgets and economic conditions, competition and new-product acceptance, G4 production and inventory execution, dependence on suppliers, and the unresolved tax-control weakness. The filing also identifies a risk of additional costs if the new headquarters is delayed.
Important facts for investors to verify
- Whether G4 production transition reduces unit costs and inventory as management expected, and whether product margins recover.
- Whether installation timing, order growth and service-base expansion support the approximately 10% full-year revenue-growth expectation.
- Progress in remediating the income-tax accounting material weakness and any effects on tax balances or reporting reliability.
- The cash-flow and occupancy impact of the approximately $40.0m headquarters lease, including construction timing and any extension of the current facility lease.
- Whether the $0.5m Medacist transfer fee is triggered and whether share repurchases continue within the remaining authorization.