Omnicell(OMCL) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides Omnicell's unaudited condensed consolidated financial statements and management's discussion and analysis ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) This section presents Omnicell's unaudited condensed consolidated financial statements, including balance sheets, income statements, cash flows, and detailed notes for Q3 2023 Condensed Consolidated Balance Sheets (Unaudited) The balance sheet shows a slight increase in total assets and stockholders' equity, while total liabilities decreased from December 31, 2022, to September 30, 2023 | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total assets | $2,221,575 | $2,210,758 | $10,817 | 0.49% | | Total liabilities | $1,034,139 | $1,080,621 | $(46,482) | -4.30% | | Total stockholders' equity | $1,187,436 | $1,130,137 | $57,299 | 5.07% | | Cash and cash equivalents | $446,840 | $330,362 | $116,478 | 35.25% | | Accounts receivable and unbilled receivables, net | $272,584 | $299,469 | $(26,885) | -8.98% | | Inventories | $116,144 | $147,549 | $(31,405) | -21.28% | | Total current liabilities | $369,361 | $428,446 | $(59,085) | -13.79% | Condensed Consolidated Statements of Operations (Unaudited) Total revenues decreased by 14% for Q3 2023 and 11% for the nine months, leading to a net loss for the nine-month period | Metric | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Total revenues | $298,663 | $348,059 | $(49,396) | -14.19% | | Product revenues | $188,755 | $246,565 | $(57,810) | -23.45% | | Services and other revenues | $109,908 | $101,494 | $8,414 | 8.29% | | Gross profit | $131,964 | $159,095 | $(27,131) | -17.05% | | Income (loss) from operations | $3,712 | $18,465 | $(14,753) | -79.90% | | Net income (loss) | $5,553 | $16,774 | $(11,221) | -66.90% | | Diluted EPS | $0.12 | $0.37 | $(0.25) | -67.57% | | Metric | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Total revenues | $888,265 | $998,273 | $(110,008) | -11.02% | | Product revenues | $562,906 | $706,246 | $(143,340) | -20.29% | | Services and other revenues | $325,359 | $292,027 | $33,332 | 11.41% | | Gross profit | $391,436 | $467,234 | $(75,798) | -16.22% | | Income (loss) from operations | $(11,503) | $36,034 | $(47,537) | -131.92% | | Net income (loss) | $(5,996) | $34,056 | $(40,052) | -117.62% | | Diluted EPS | $(0.13) | $0.73 | $(0.86) | -117.81% | Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Comprehensive income decreased significantly for Q3 2023, resulting in a comprehensive loss for the nine-month period | Metric | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Net income (loss) | $5,553 | $16,774 | $(11,221) | -66.90% | | Foreign currency translation adjustments | $(2,953) | $(6,770) | $3,817 | -56.38% | | Comprehensive income (loss) | $2,600 | $10,004 | $(7,404) | -74.01% | | Metric | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Net income (loss) | $(5,996) | $34,056 | $(40,052) | -117.62% | | Foreign currency translation adjustments | $(42) | $(15,735) | $15,693 | -99.73% | | Comprehensive income (loss) | $(6,038) | $18,321 | $(24,359) | -132.96% | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) Total stockholders' equity increased, driven by additional paid-in capital from share-based compensation and employee stock plans | Metric | Dec 31, 2022 (In thousands) | Sep 30, 2023 (In thousands) | Change (In thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | | Total Stockholders' Equity | $1,130,137 | $1,187,436 | $57,299 | | Additional Paid-In Capital | $1,046,760 | $1,110,096 | $63,336 | | Retained Earnings | $390,728 | $384,732 | $(5,996) | | Accumulated Other Comprehensive Loss | $(17,087) | $(17,129) | $(42) | - Issuance of common stock under employee stock plans contributed $12.1 million and $3.1 million in Q1 and Q2 2023, respectively, and $7.8 million in Q3 2023[19] - Share-based compensation added $15.2 million, $15.1 million, and $16.1 million to additional paid-in capital in Q1, Q2, and Q3 2023, respectively[19] Condensed Consolidated Statements of Cash Flows (Unaudited) Operating cash flow significantly improved for the nine months ended September 30, 2023, with a net increase in cash | Cash Flow Activity | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | | Net cash provided by (used in) operating activities | $142,680 | $(4,372) | $147,052 | | Net cash used in investing activities | $(42,644) | $(41,417) | $(1,227) | | Net cash provided by (used in) financing activities | $10,290 | $(24,515) | $34,805 | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $109,862 | $(71,729) | $181,591 | - Operating cash flow improved due to a decrease in inventories ($31.7 million), a decrease in accounts receivable ($27.1 million), and an increase in deferred revenues ($23.6 million)[185] - Investing activities primarily consisted of capital expenditures for property and equipment ($32.4 million) and external-use software development costs ($10.2 million)[187] Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed disclosures on accounting policies, financial instruments, debt, equity, and other financial components Note 1. Organization and Summary of Significant Accounting Policies Omnicell provides medication management solutions, operates as a single segment, and adopted ASU 2021-08 prospectively from January 1, 2023 - Omnicell, Inc. was reincorporated in Delaware in 2001 and focuses on medication management solutions and adherence tools for the healthcare industry, primarily in the United States and Europe[28] - The company manages its operations as a single segment, with the CEO acting as the Chief Operating Decision Maker (CODM), evaluating performance at the consolidated level[33] - ASU 2021-08, requiring recognition and measurement of contract assets and liabilities acquired in business combinations per ASC 606, was adopted on January 1, 2023, applied prospectively[34] Note 2. Revenues Omnicell generates revenue from connected devices, software, consumables, and services, with product revenues recognized at a point in time | Revenue Category | Timing of Revenue Recognition | Income Statement Classification | | :-------------------------------- | :-------------------------------------------------------------------------------- | :------------------------------ | | Connected devices, software licenses, and other | Point in time, generally upon installation and acceptance | Product | | Consumables | Point in time, generally upon shipment to or receipt by customer | Product | | Technical services | Over time, typically ratably over the service term | Service | | Advanced Services | Over time, as services are provided | Service | | Revenue Type | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Connected devices, software licenses, and other | $167,560 | $226,415 | $500,182 | $650,125 | | Consumables | $21,195 | $20,150 | $62,724 | $56,121 | | Technical services | $57,303 | $53,914 | $167,851 | $156,386 | | Advanced Services | $52,605 | $47,580 | $157,508 | $135,641 | | Total revenues | $298,663 | $348,059 | $888,265 | $998,273 | | Geographic Region | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | United States | $272,649 | $315,755 | $785,794 | $898,269 | | Rest of world | $26,014 | $32,304 | $102,471 | $100,004 | | Total revenues | $298,663 | $348,059 | $888,265 | $998,273 | | Contract Asset/Liability | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total contract assets | $33,434 | $40,507 | | Total contract liabilities | $180,044 | $156,332 | Note 3. Net Income (Loss) Per Share Diluted net income per share decreased for Q3 2023, resulting in a net loss per share for the nine-month period | Metric | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net income (loss) (In thousands) | $5,553 | $16,774 | $(5,996) | $34,056 | | Weighted-average shares outstanding – basic (In thousands) | 45,333 | 44,441 | 45,117 | 44,304 | | Net income (loss) per share – basic | $0.12 | $0.38 | $(0.13) | $0.77 | | Net income (loss) per share – diluted | $0.12 | $0.37 | $(0.13) | $0.73 | Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments Cash and cash equivalents increased, with financial instruments measured at fair value within Level 1 and Level 2 hierarchy | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $446,840 | $330,362 | | Cash equivalents | $429,700 | $301,000 | | Fair value of convertible senior notes | $518,600 | $501,400 | | Carrying value of convertible senior notes | $568,900 | $566,600 | - Cash and cash equivalents primarily consist of bank accounts and highly-liquid U.S. Government money market funds[49] - The company's cash, cash equivalents, and restricted cash are classified within Level 1 of the fair value hierarchy, while the credit facility and convertible senior notes are classified within Level 2[50] Note 5. Balance Sheet Components Inventories, other current assets, and accrued liabilities decreased, while funds held for customers also saw a reduction | Balance Sheet Component | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Inventories | $116,144 | $147,549 | $(31,405) | -21.28% | | Other current assets | $50,236 | $77,362 | $(27,126) | -35.06% | | Other long-term assets | $90,766 | $105,017 | $(14,251) | -13.57% | | Accrued liabilities | $150,385 | $172,655 | $(22,270) | -12.90% | | Funds held for customers, including restricted cash | $30,967 | $56,703 | $(25,736) | -45.39% | Note 6. Property and Equipment Net property and equipment increased, driven by equipment and software development costs, with higher depreciation expense | Property and Equipment (Net) | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Total property and equipment, net | $106,880 | $93,961 | $12,919 | 13.75% | | Equipment | $95,891 | $91,391 | $4,500 | 4.92% | | Purchased software and internal-use software development costs | $97,860 | $76,327 | $21,533 | 28.21% | | Depreciation and Amortization Expense | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Depreciation and amortization expense | $6,700 | $5,800 | $19,600 | $16,700 | Note 7. External-Use Software Development Costs Net external-use software development costs decreased, with amortization expense remaining relatively stable year-over-year | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | External-use software development costs, net | $69,872 | $80,760 | $(10,888) | -13.48% | | Amortization Expense | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Amortization of external-use software development costs | $7,100 | $7,300 | $21,900 | $21,500 | | Estimated Future Amortization (In thousands) | Amount | | :-------------------------------- | :----- | | Remaining three months of 2023 | $6,787 | | 2024 | $24,747 | | 2025 | $17,608 | | 2026 | $12,069 | | 2027 | $6,114 | | Thereafter | $2,547 | | Total | $69,872 | Note 8. Goodwill and Intangible Assets Goodwill remained stable, while net intangible assets decreased due to amortization of customer relationships and technology | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------- | :------- | | Goodwill | $734,328 | $734,274 | $54 | 0.01% | | Total intangibles assets, net | $218,861 | $242,906 | $(24,045) | -9.90% | | Customer relationships, net | $195,763 | $210,398 | $(14,635) | -6.96% | | Acquired technology, net | $20,084 | $27,767 | $(7,683) | -27.67% | | Amortization Expense | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Amortization expense of intangible assets | $7,700 | $8,700 | $24,100 | $26,700 | | Estimated Future Amortization (In thousands) | Amount | | :-------------------------------- | :----- | | Remaining three months of 2023 | $7,483 | | 2024 | $23,093 | | 2025 | $21,056 | | 2026 | $18,061 | | 2027 | $16,754 | | Thereafter | $132,414 | | Total | $218,861 | Note 9. Debt and Credit Agreement Omnicell entered a new credit agreement for a $350 million revolving facility, with no outstanding balance as of September 30, 2023 - On October 10, 2023, Omnicell entered into a Second Amended and Restated Credit Agreement, replacing the Prior A&R Credit Agreement[68] - The new agreement includes a $350.0 million five-year revolving credit facility and an uncommitted incremental loan facility, expiring on October 10, 2028[68] - As of September 30, 2023, the company had $500.0 million available under the Prior Revolving Credit Facility with no outstanding balance and was in compliance with all covenants[73] Note 10. Convertible Senior Notes The company holds $575 million in convertible senior notes due 2025, with no conversion conditions met in Q3 2023 - The company has $575.0 million aggregate principal amount of 0.25% convertible senior notes due September 15, 2025[74] - As of September 30, 2023, none of the conditional conversion features were triggered, classifying the notes as a long-term liability[76] | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Principal amount | $575,000 | $575,000 | | Unamortized debt issuance costs | $(6,113) | $(8,429) | | Convertible senior notes, net | $568,887 | $566,571 | | Interest Expense Component | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Contractual coupon interest | $359 | $359 | $1,078 | $1,078 | | Amortization of debt issuance costs | $773 | $768 | $2,316 | $2,298 | Note 11. Lessor Leases Sales-type lease income increased for Q3 2023 but decreased for the nine months, with net investment in leases growing | Metric | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Sales-type lease revenues | $14,388 | $10,115 | $27,960 | $34,033 | | Selling profit on sales-type lease revenues | $4,758 | $7,247 | $13,777 | $17,070 | | Rental income (Operating leases) | $1,330 | $2,327 | $5,459 | $7,220 | | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net investment in sales-type leases | $53,249 | $44,410 | | Long-term investment in sales-type leases, net | $41,631 | $32,924 | | Future Minimum Sales-Type Lease Payments (In thousands) | Amount | | :-------------------------------- | :----- | | Remaining three months of 2023 | $3,828 | | 2024 | $13,431 | | 2025 | $11,351 | | 2026 | $9,053 | | 2027 | $7,286 | | Thereafter | $17,521 | | Total net investment in sales-type leases | $53,249 | Note 12. Lessee Leases Operating lease liabilities totaled $43.5 million, with costs decreasing and significant impairment charges due to restructuring | Metric | Sep 30, 2023 (In thousands) | | :-------------------------------- | :-------------------------- | | Total operating lease liabilities | $43,462 | | Current portion of operating lease liabilities | $10,617 | | Long-term operating lease liabilities | $32,845 | | Operating Lease Costs (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Operating lease costs | $2,600 | $4,000 | $8,200 | $12,800 | | Impairment and abandonment charges | N/A | $300 | $7,800 | $5,400 | | Lease Metrics | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Weighted-average remaining lease term (years) | 4.6 | 5.0 | | Weighted-average discount rate (%) | 5.7% | 5.7% | Note 13. Commitments and Contingencies Non-cancelable purchase commitments totaled $118.7 million, with ransomware expenses largely offset by insurance recoveries - Non-cancelable purchase commitments totaled $118.7 million as of September 30, 2023, with $78.1 million expected to be paid within the year ending December 31, 2023[93] | Ransomware Incident Expenses (In thousands) | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Total expenses | $1,000 | $13,500 | | Expected insurance recoveries | N/A | $11,100 | | Net expenses | N/A | $2,400 | | Cumulative Ransomware Impact (In thousands) | Amount | | :-------------------------------- | :----- | | Cumulative expenses since detection | $13,600 | | Insurance recoveries received | $11,600 | - The company has not recorded any material accrual for contingent liabilities related to legal proceedings, believing any potential material loss is not probable[97] Note 14. Income Taxes Omnicell recorded a $4.4 million provision for income taxes for the nine months ended September 30, 2023, a shift from a prior year benefit | Metric | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Provision for (benefit from) income taxes | $1,829 | $543 | $4,405 | $(995) | | Unrecognized Tax Benefits (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Gross unrecognized tax benefits | $10,100 | $9,300 | | Accrued interest and penalties | $400 | $200 | - The 2023 annual effective tax rate before discrete items was influenced by R&D credits and FDII benefit, partially offset by non-deductible compensation and GILTI tax inclusion[100] - The Inflation Reduction Act of 2022, introducing a 15% corporate alternative minimum tax and 1% excise tax on net stock repurchases, did not materially impact the company's income tax provision for the nine months ended September 30, 2023[101] Note 15. Employee Benefits and Share-Based Compensation Share-based compensation expense decreased, with 9.1 million shares reserved for future issuance under various equity plans | Share-Based Compensation Expense (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total share-based compensation expense | $14,982 | $17,310 | $43,113 | $50,731 | | Equity Incentive Plan Activity (9 Months Ended Sep 30, 2023, in thousands) | Shares Outstanding/Unvested | | :-------------------------------- | :-------------------------- | | Stock options outstanding | 2,120 | | RSUs outstanding and unvested | 1,236 | | RSAs outstanding and unvested | 24 | | PSUs outstanding and unvested | 99 | | Total shares reserved for future issuance | 9,146 | - Employees purchased approximately 353,000 shares under the ESPP at a weighted-average price of $46.68 for the nine months ended September 30, 2023[107] - The 2014 Repurchase Program was completed in Q1 2022, and $2.7 million remains available under the 2016 Repurchase Program as of September 30, 2023. No stock repurchases occurred in Q3 2023[117][118] Note 16. Restructuring Expenses Omnicell incurred $5.5 million in employee severance costs for the nine months ended September 30, 2023, due to restructuring plans | Employee-Related Restructuring Expense (In thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total restructuring expense, net of reversals | $(581) | $1,794 | $5,454 | $5,321 | | Restructuring Plan Balances (In thousands) | Sep 30, 2023 | Dec 31, 2022 | | :-------------------------------- | :----------- | :----------- | | Unpaid balance related to the Plan | $1,000 | $18,200 | - The restructuring plan initiated in November 2022 and expanded in Q1 2023 aims to reduce headcount and real estate footprint due to macroeconomic headwinds and a hybrid work strategy[120] Note 17. Subsequent Events Omnicell entered a new credit agreement and announced a new restructuring plan in Q4 2023, with estimated charges of $12-18 million - On October 10, 2023, Omnicell entered into the Second Amended and Restated Credit Agreement, superseding the Prior A&R Credit Agreement[123] - On November 2, 2023, the company announced the '2023 Plan' to reduce headcount and real estate footprint, estimating $12 million to $18 million in nonrecurring restructuring and related charges[124] - The 2023 Plan charges consist of approximately $9 million to $12 million cash-based for severance and $3 million to $6 million non-cash for office closures, with substantial completion expected by Q2 2024[124] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management discusses Omnicell's financial condition and results for Q3 2023, covering revenue, costs, liquidity, and strategy FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS This section highlights forward-looking statements subject to risks and uncertainties that could cause actual results to differ - Forward-looking statements cover expectations for future sales, bookings, revenues, market growth, investment in the Autonomous Pharmacy, and development of new products and services[126] - Such statements are subject to known and unknown risks and uncertainties, many beyond the company's control, which may cause actual results to differ materially[129] - The company assumes no obligation to publicly update any forward-looking statements, except as required by law[129] OVERVIEW Omnicell leads in medication management, leveraging intelligent infrastructure and the Autonomous Pharmacy vision to address industry challenges - Omnicell is focused on optimizing medication management across all care settings through an intelligent infrastructure to achieve the Autonomous Pharmacy vision, aiming for zero-error medication management[133] - Bookings are defined as the value of non-cancelable contracts for connected devices, software products, Advanced Services (with minimum commitment), and consumables, excluding technical services and freight revenue[136] - The company's business strategy addresses significant challenges in pharmacy, such as labor shortages, medication errors, and waste, by investing in R&D and delivering solutions across Point of Care, Central Pharmacy and IV Compounding, Specialty Pharmacy and 340B Program, and Retail, Institutional, and Payer market categories[141][142][146] CRITICAL ACCOUNTING POLICIES AND ESTIMATES Financial statements require significant judgments in areas like revenue recognition, inventory, and goodwill, with no material changes in Q3 2023 - Critical accounting policies involve significant judgments and estimates in areas including revenue recognition, allowance for credit losses, inventory, software development costs, leases, goodwill and intangible asset valuation, business combinations, share-based compensation, and income taxes[146] - No material changes in critical accounting estimates were made during the nine months ended September 30, 2023, compared to those disclosed in the 2022 Annual Report on Form 10-K, except for the prospective adoption of ASU 2021-08[148] RESULTS OF OPERATIONS Omnicell saw declining revenues and gross profit, but operating expenses decreased due to cost-saving initiatives, and interest income rose Total Revenues Total revenues decreased by 14% for Q3 and 11% for the nine months, driven by lower product revenues, while services grew | Revenue Category | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Product revenues | $188,755 | $246,565 | $(57,810) | -23% | | Services and other revenues | $109,908 | $101,494 | $8,414 | 8% | | Total revenues | $298,663 | $348,059 | $(49,396) | -14% | | Revenue Category | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Product revenues | $562,906 | $706,246 | $(143,340) | -20% | | Services and other revenues | $325,359 | $292,027 | $33,332 | 11% | | Total revenues | $888,265 | $998,273 | $(110,008) | -11% | - Product revenues decreased primarily due to lower volumes from automated dispensing systems, impacted by health systems' capital budget and labor constraints[151][154] - Services and other revenues increased due to higher customer demand for Advanced Services, growth in the installed customer base, and pricing actions[152][155] Cost of Revenues and Gross Profit Cost of revenues decreased, but gross profit declined due to a disproportionate drop in product revenues relative to fixed costs | Cost of Revenues & Gross Profit | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Cost of product revenues | $106,311 | $134,023 | $(27,712) | -21% | | Cost of services and other revenues | $60,388 | $54,941 | $5,447 | 10% | | Total cost of revenues | $166,699 | $188,964 | $(22,265) | -12% | | Gross profit | $131,964 | $159,095 | $(27,131) | -17% | | Gross margin | 44% | 46% | -2% | N/A | | Cost of Revenues & Gross Profit | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Cost of product revenues | $323,800 | $374,175 | $(50,375) | -13% | | Cost of services and other revenues | $173,029 | $156,864 | $16,165 | 10% | | Total cost of revenues | $496,829 | $531,039 | $(34,210) | -6% | | Gross profit | $391,436 | $467,234 | $(75,798) | -16% | | Gross margin | 44% | 47% | -3% | N/A | - The decrease in cost of product revenues was primarily due to lower product revenues and reduced inventory-related costs (semiconductors, steel, freight)[161][164] - Gross margin declined because the decrease in cost of product revenues did not proportionally offset the larger decrease in product revenues, mainly due to certain fixed costs like labor and overhead[162][165] Operating Expenses and Interest and Other Income (Expense), Net Operating expenses decreased due to cost-saving initiatives, while interest and other income significantly improved from higher interest rates | Operating Expenses & Other Income | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Research and development | $24,281 | $25,171 | $(890) | -4% | | Selling, general, and administrative | $103,971 | $115,459 | $(11,488) | -10% | | Total operating expenses | $128,252 | $140,630 | $(12,378) | -9% | | Interest and other income (expense), net | $3,670 | $(1,148) | $4,818 | -420% | | Operating Expenses & Other Income | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | Change (In thousands) | % Change | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :-------------------- | :------- | | Research and development | $70,296 | $76,556 | $(6,260) | -8% | | Selling, general, and administrative | $332,643 | $354,644 | $(22,001) | -6% | | Total operating expenses | $402,939 | $431,200 | $(28,261) | -7% | | Interest and other income (expense), net | $9,912 | $(2,973) | $12,885 | -433% | - R&D expenses decreased due to cost-saving initiatives and lower consulting expenses[166][169] - SG&A expenses decreased due to lower consulting, commission, freight out, employee-related restructuring, rent, and ransomware-related expenses, partially offset by executive transition costs[167][170] - Interest and other income (expense), net, improved significantly due to higher interest income from increased interest rates and cash balances[168][171] Provision for (Benefit from) Income Taxes Omnicell recorded a $4.4 million tax provision for the nine months ended September 30, 2023, a shift from a prior year benefit | Income Tax | 3 Months Ended Sep 30, 2023 (In thousands) | 3 Months Ended Sep 30, 2022 (In thousands) | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | :--------------------------------------- | | Provision for (benefit from) income taxes | $1,829 | $543 | $4,405 | $(995) | - The change from a tax benefit in 2022 to a tax provision in 2023 was primarily due to a decrease in excess tax benefit from equity compensation and the change in income (loss) before income taxes[172] LIQUIDITY AND CAPITAL RESOURCES Cash and working capital improved, with a refinanced credit facility and significant operating cash generation, supporting future growth | Metric | Sep 30, 2023 (In thousands) | Dec 31, 2022 (In thousands) | | :-------------------------------- | :-------------------------- | :-------------------------- | | Cash and cash equivalents | $446,840 | $330,362 | | Working capital | $544,390 | $453,366 | | Ratio of current assets to current liabilities | 2.5:1 | 2.1:1 | - The company believes existing cash, anticipated cash flows from operations, and the revolving credit facility will be sufficient to meet cash needs for at least the next twelve months and fund continued business growth beyond that[182] Sources of Cash Omnicell's cash sources include operating activities and a new $350 million revolving credit facility, with no outstanding balance - On October 10, 2023, Omnicell entered into a Second Amended and Restated Credit Agreement, providing a $350.0 million five-year revolving credit facility[178] - As of September 30, 2023, the company had $500.0 million available under the Prior Revolving Credit Facility with no outstanding balance and was in compliance with all covenants[179] Uses of Cash Future cash uses include working capital, capital expenditures, potential acquisitions, and remaining stock repurchases - Expected future uses of cash include working capital, capital expenditures, contractual obligations, potential acquisitions, and common stock repurchases[180] - As of September 30, 2023, $2.7 million remains available for repurchases under the 2016 Repurchase Program; no stock repurchases occurred during the nine months ended September 30, 2023[181] Cash Flows Operating cash flow significantly increased, while investing activities used cash for capital and software, and financing provided cash | Cash Flow Activity | 9 Months Ended Sep 30, 2023 (In thousands) | 9 Months Ended Sep 30, 2022 (In thousands) | | :-------------------------------- | :--------------------------------------- | :--------------------------------------- | | Net cash provided by (used in) operating activities | $142,680 | $(4,372) | | Net cash used in investing activities | $(42,644) | $(41,417) | | Net cash provided by (used in) financing activities | $10,290 | $(24,515) | | Net increase (decrease) in cash, cash equivalents, and restricted cash | $109,862 | $(71,729) | - Operating cash flow improved due to decreases in inventories and accounts receivable, and an increase in deferred revenues[185] - Investing activities included $32.4 million for property and equipment and $10.2 million for external-use software development costs[187] - Financing activities were positively impacted by $23.0 million from stock-based compensation plans, partially offset by $6.1 million in employee taxes related to RSUs and a $6.6 million change in customer funds[189] Contractual Obligations Total contractual obligations are $746.1 million, primarily convertible senior notes, purchase obligations, and operating leases | Contractual Obligation | Total (In thousands) | Remainder of 2023 (In thousands) | 2024 - 2025 (In thousands) | 2026 - 2027 (In thousands) | 2028 and thereafter (In thousands) | | :-------------------------------- | :------------------- | :------------------------------- | :------------------------- | :------------------------- | :--------------------------------- | | Operating leases | $49,540 | $3,340 | $21,870 | $16,276 | $8,054 | | Purchase obligations | $118,658 | $78,055 | $40,471 | $132 | $0 | | Convertible senior notes | $577,875 | $0 | $577,875 | $0 | $0 | | Total | $746,073 | $81,395 | $640,216 | $16,408 | $8,054 | - The convertible senior notes, due in September 2025, represent the largest portion of contractual obligations[191] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Omnicell faces foreign currency and interest rate risks, using forward contracts to mitigate currency risk, with no significant changes in Q3 2023 - Omnicell is exposed to foreign currency exchange rate fluctuations, mainly involving the British Pound and Euro, and uses foreign exchange forward contracts to mitigate this risk[193] - As of September 30, 2023, the company had no outstanding foreign exchange forward contracts or interest rate swap agreements[193][196] - Interest rate risk primarily stems from borrowing activities and the fair value of convertible senior notes, which had a carrying amount of $568.9 million and a fair value of $518.6 million as of September 30, 2023[194][195] ITEM 4. CONTROLS AND PROCEDURES Management concluded disclosure controls were effective, acknowledging inherent limitations, with no material changes in internal control - Management concluded that disclosure controls and procedures were effective at the reasonable assurance level as of September 30, 2023[199] - All internal control systems have inherent limitations and can only provide reasonable assurance that objectives are met[200] - There were no material changes in internal control over financial reporting during the three months ended September 30, 2023[201] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, defaults, mine safety, other information, and exhibits ITEM 1. LEGAL PROCEEDINGS Legal proceedings information is referenced from Note 13, with no material accruals for contingent liabilities recorded - Information on legal proceedings is incorporated by reference from Note 13, Commitments and Contingencies[204] ITEM 1A. RISK FACTORS Substantial debt and restrictive covenants pose significant risks to Omnicell's financial flexibility and business operations - The company's substantial debt, including a $350.0 million revolving credit facility and $575.0 million in convertible senior notes, could limit borrowing ability, restrict cash flow for operations, and increase vulnerability to adverse economic conditions[206][207][208][209] - The Second A&R Credit Agreement contains restrictive covenants, including a maximum consolidated secured net leverage ratio of 3.00:1 and a minimum consolidated interest coverage ratio of 3.00:1, which could lead to default if not met[212][213] - Failure to comply with covenants could result in immediate repayment of outstanding borrowings or foreclosure on assets, severely harming the business[213] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS No shares of common stock were repurchased under the company's repurchase program during Q3 2023 - No shares of common stock were repurchased under the company's repurchase program during the three months ended September 30, 2023[214] ITEM 3. DEFAULTS UPON SENIOR SECURITIES No defaults upon senior securities were reported for the period - No defaults upon senior securities were reported[215] ITEM 4. MINE SAFETY DISCLOSURES This item is not applicable to Omnicell, Inc - Mine Safety Disclosures are not applicable to the registrant[216] ITEM 5. OTHER INFORMATION No directors or officers adopted or terminated Rule 10b5-1 trading plans during Q3 2023 - No directors or officers adopted or terminated Rule 10b5-1 trading plans or non-Rule 10b5-1 trading arrangements during the three months ended September 30, 2023[217] ITEM 6. EXHIBITS This section lists all exhibits filed with the Form 10-Q, including management contracts, credit agreements, and certifications - Exhibits include management contracts, compensation plans, separation agreements, the Second Amended and Restated Credit Agreement, and various certifications (CEO, CFO)[218] Signature The report was signed by Nchacha E. Etta, Executive Vice President & Chief Financial Officer, on November 3, 2023 - The report was signed by Nchacha E. Etta, Executive Vice President & Chief Financial Officer, on November 3, 2023[225]