Omnicell, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Omnicell provides medication and supply automation, related software and services, and medication-adherence solutions. Results are unaudited; prior-year comparisons reflect the company’s retrospective adoption of ASC 606.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $204.3 million | $186.7 million | $575.6 million | $516.3 million |
| Gross profit / margin | $98.9 million / 48% | $84.8 million / 45% | $270.1 million / 47% | $225.1 million / 44% |
| Operating income (loss) | $17.5 million | $12.2 million | $25.5 million | $(5.1) million |
| Net income (loss) | $13.6 million | $7.7 million | $22.9 million | $(0.7) million |
| Diluted EPS | $0.33 | $0.20 | $0.57 | $(0.02) |
| Operating cash flow | Not presented quarterly | $56.5 million | $20.6 million |
- Q3 revenue rose 9%; nine-month revenue rose 11%. Product revenue increased 9% in Q3 and 13% year to date; services and other revenue increased 9% and 7%, respectively.
- Automation and Analytics revenue grew 9% in Q3 and 12% year to date. Medication Adherence revenue grew 12% and 7%, respectively.
- Automation and Analytics gross margin improved to 54% in Q3 and 51% year to date. Medication Adherence gross margin declined to 22% and 27%, respectively, from 31% and 32%.
- Cash and cash equivalents were $44.2 million at September 30, 2018, versus $32.4 million at year-end 2017. Working capital was $166.5 million and the current ratio was 1.8:1.
- Debt under the credit facilities was $190.0 million gross ($184.8 million net of unamortized issuance costs), versus $217.0 million gross at year-end 2017. The company repaid $27.0 million during the first nine months and reported covenant compliance.
- Investing cash outflow was $41.5 million, including $19.3 million for property and equipment and $22.2 million for software development. Cash increased $11.8 million during the period.
Changes and management commentary
- Q3 revenue gains reflected a large Performance Center installation, other product-mix growth, Medication Adherence consumables and machine sales, and a larger installed base supporting service revenue. Year-to-date Automation and Analytics growth also reflected XT Series sales and increased Performance Center revenue.
- Gross-margin improvement reflected product mix, higher average selling prices, and lower XT Series manufacturing costs as production ramped. Medication Adherence costs included a $2.1 million excess and obsolete inventory reserve for slower-moving inventory.
- Year-to-date operating results included a $2.5 million contingent gain related to the Ateb acquisition settlement. A North America and France commercial-group realignment resulted in $3.0 million of severance and related costs accrued and paid during the first nine months.
- Management said existing cash, expected operating cash flows, employee equity-plan proceeds, and available credit are sufficient for anticipated needs for at least the next 12 months. The filing provides no specific revenue or earnings guidance.
- ASC 606 was adopted effective January 1, 2018 using the full retrospective method. Changes included GPO fees presented as a reduction of revenue and revised timing for certain software-license revenue and sales commissions. The filing presents adjusted prior-year comparatives.
Risks, contingencies and liquidity considerations
- Revenue timing depends on customer installation schedules and acceptance; delays, bookings conversion, product adoption, and the ability to complete installations could affect results. Healthcare customers’ capital budgets and lengthy purchasing cycles are additional demand risks.
- Medication Adherence margins weakened, including from the inventory reserve. Inventory obsolescence, supplier concentration, and the ability to meet time-sensitive consumables demand could pressure revenue or profitability.
- The $190.0 million of facility debt is subject to financial and other covenants; the company also disclosed $75.9 million of non-cancelable purchase commitments and $73.9 million of future operating-lease payments. Management expects adoption of the new lease standard in 2019 to add operating-lease assets and liabilities, but does not expect a material effect on cash flows or results of operations.
- Three disclosed legal matters include a product-liability/negligence case, a class action alleging Illinois biometric-privacy violations, and an insurer declaratory action concerning defense and indemnity in the latter matter. The company recorded no accrual because it considered losses reasonably possible but not probable; possible loss ranges were not estimable.
- Other material risks include competition and new-product execution, acquisition integration, debt and covenant constraints, cybersecurity and privacy obligations, foreign-exchange exposure, and healthcare regulation. The company reported no outstanding foreign-exchange forward contracts at quarter-end.
Investor verification priorities
- Confirm whether revenue growth and bookings convert into installations and recognized revenue on schedule, particularly for newer offerings.
- Track Medication Adherence gross margin, inventory levels, and any further obsolescence charges.
- Assess the sustainability of operating cash flow given receivables, inventory buildup, capitalized software spending, and deferred-revenue movements.
- Review debt repayment, interest-rate exposure, covenant headroom, and the ability to meet purchase and lease commitments.
- Monitor developments and potential financial exposure in the disclosed litigation, including insurance coverage.
- Separate recurring operating performance from the Ateb-related contingent gain, restructuring costs, and effects of ASC 606 presentation changes.