Omnicell(OMCL) - 2023 Q4 - Annual Report

Part I Business Omnicell leads in medication management, leveraging robotics, software, and services to achieve autonomous pharmacy operations and reduce errors Overview Omnicell transforms pharmacy care by providing an industry-leading medication management infrastructure to achieve zero-error medication management - Omnicell provides a medication management infrastructure that includes robotics, smart devices, intelligent software, and expert services to support the industry vision of the Autonomous Pharmacy[20] Business Strategy Omnicell's strategy addresses pharmacy challenges like labor shortages and errors through automation, focusing on four key market categories for long-term growth - The company identifies major challenges in the pharmacy industry, including budget constraints, labor shortages, drug diversion, and manual processes, as key drivers for the demand for its automation and medication management solutions[21] - Omnicell's strategic focus is on four main market categories: - Point of Care: Expanding dispensing systems within hospitals and ambulatory settings - Central Pharmacy and IV Compounding: Automating high-volume, error-prone processes - Specialty Pharmacy and 340B Program: Helping health systems optimize programs to improve outcomes and drive savings - Retail, Institutional, and Payer: Driving adoption of patient engagement solutions as care shifts to retail and home settings[23][28] Products and Services Omnicell provides a comprehensive suite of medication management products and services, including point-of-care automation, central pharmacy solutions, and patient engagement tools - Point of Care: XT Series automated dispensing systems for medications and supplies, designed to improve clinician workflows in various hospital departments[26][27] - Central Pharmacy and IV Compounding: Comprehensive services combining advanced robotics and expert operators to optimize medication dispensing and IV compounding, aiming to enhance safety and reduce waste[28][29] - Specialty Pharmacy and 340B: A fully managed service to help health systems operate in-house specialty pharmacies, including support for payer contracting, staffing, and 340B Program administration[30] - Advanced Services: A combination of robotics, smart devices, intelligent software, and expert services designed to deliver improved medication management outcomes. These include Central Pharmacy Dispensing Service, IV Compounding Service, and EnlivenHealth solutions[43] Industry Background and Market The healthcare market faces rising costs, workforce shortages, and medication non-adherence, driving demand for Omnicell's automation and technology solutions - The U.S. healthcare market faces rising costs, with prescription drug expenditures reaching approximately $634 billion in 2022[47] - Workforce challenges are a top concern for hospital CEOs, with significant shortages of nurses (90% of CEOs reporting) and pharmacy technicians (vacancy rates of 20-30%)[51] - Medication non-adherence is a major issue, with an estimated annual cost of $528 billion in 2016 due to non-optimized medication therapy[50] Government Regulation Omnicell's global operations are subject to extensive healthcare, data privacy, and medical device regulations, requiring significant compliance efforts and posing potential risks - The company is subject to numerous U.S. and international laws, including healthcare fraud and abuse laws like the Anti-Kickback Statute and the False Claims Act[60][61][62] - Omnicell manufactures products classified as Class I and Class II medical devices, which are subject to FDA regulation, including Quality System Regulation and medical device reporting[57] - The company's handling of personal health information subjects it to data privacy laws like HIPAA in the U.S. and GDPR in Europe, with emerging regulations around AI also impacting its business[55][56] Sales and Distribution Omnicell primarily sells in the US through a direct sales force and GPOs, with lengthy sales cycles for complex automation systems - Approximately 88% of the company's revenue was generated in the United States for the year ended December 31, 2023[67] - Sales to members of the ten largest Group Purchasing Organizations (GPOs) and federal agencies under the GSA Contract accounted for approximately 64% of total consolidated revenues in fiscal year 2023[70] - The sales cycle for automation systems is long, often taking 12 to 24 months from initial meeting to installation, due to the cost and complexity of the systems[69] Backlog Total backlog decreased to $1.14 billion in 2023, driven by lower product backlog but offset by growth in Advanced Services backlog, indicating a business mix shift Backlog Summary (in thousands) | | December 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total backlog | $1,142,686 | $1,215,462 | | Product backlog | $610,832 | $796,967 | | Advanced Services backlog | $531,854 | $418,495 | - Backlog is defined as the dollar amount of bookings not yet recognized as revenue. While it may not indicate the timing of future revenue due to potential customer changes, it is considered an indication of future revenue generation[93] Human Capital Management Omnicell reduced its workforce to 3,650 employees in 2023 due to restructuring, focusing on engagement, development, and DEIB initiatives - Employee headcount was approximately 3,650 as of December 31, 2023, a decrease of approximately 580 employees from year-end 2022, reflecting restructuring initiatives[98] - The company conducts an Employee Engagement Survey, achieving a satisfaction score of 68 in September 2023, which was a three-point increase from the beginning of the year but below the Glint benchmark average[99] - In 2023, the company introduced four Employee Impact Groups (EIGs) focused on Black Inclusion, LGBTQ+, Mental Health & Disability Inclusion, and Women in Technology to shape its DEIB vision and strategy[107] Risk Factors Omnicell faces diverse risks including economic downturns, strategic transition challenges, intense competition, technology issues, regulatory compliance, cybersecurity threats, and financial obligations - Economic and Demand Risks: Unfavorable economic conditions, customer labor shortages, and capital budget constraints can reduce demand for the company's capital equipment and solutions, leading to decreased revenues[120] - Strategic and Market Risks: The transition to subscription-based Advanced Services carries risks, including potential temporary revenue reduction and customer retention challenges. The company operates in highly competitive markets and faces pressure on pricing and market share[132][142] - Legal and Regulatory Risks: The company is subject to complex healthcare laws (e.g., Anti-Kickback Statute, False Claims Act) and data privacy regulations (e.g., HIPAA, GDPR), with non-compliance potentially leading to significant fines and penalties[149][182][186] - Data Security and Technology Risks: Significant disruptions to IT systems or cybersecurity attacks, like the May 2022 ransomware incident, could adversely impact business operations and reputation. Errors in Advanced Services could also expose the company to liability[133][166] - Debt and Financial Risks: The company has substantial debt, including convertible notes, which could impair financial flexibility. Conversion of these notes may dilute stockholder ownership[146][225] Unresolved Staff Comments The company reports that there are currently no unresolved written comments from the staff of the U.S. Securities and Exchange Commission (SEC) - There are no unresolved issues with respect to any SEC staff's written comments[235] Cybersecurity Omnicell manages cybersecurity risk through a comprehensive program overseen by its Audit Committee, implementing enhanced defenses following a 2022 ransomware incident - The Audit Committee of the Board of Directors is primarily responsible for overseeing the company's information security and technology risks, including cybersecurity[237] - Following a May 4, 2022 ransomware incident, the company implemented a three-pronged approach to enhance security, focusing on reducing exposure, raising security awareness, and strengthening defenses through measures like multifactor authentication and Endpoint Detection and Response solutions[240][241] - The company does not believe the 2022 ransomware incident, or other identified cyber risks, have had or will have a material adverse effect on its business, operating results, cash flow, or financial condition[246] Properties Omnicell operates its headquarters and several other key leased facilities across the US, UK, and Germany for administration, manufacturing, and R&D Material Leased Facilities | Site | Major Activity | Approximate Square Footage | | :--- | :--- | :--- | | St. Petersburg, Florida | Administration, R&D, sales, manufacturing | 167,700 | | Warrendale, Pennsylvania | Manufacturing and R&D | 107,400 | | Cranberry Township, PA | Administration, R&D, sales, support | 58,400 | | Irlam, United Kingdom | Administration, sales, distribution | 61,000 | | Milpitas, California | Administration, manufacturing, R&D | 46,300 | | Fort Worth, Texas | Administration, sales, R&D | 34,400 | Legal Proceedings Omnicell is involved in routine legal proceedings, with management assessing no material impact on financial position or operations - The company has not recorded any material accrual for contingent liabilities from legal proceedings, as it believes a material loss is not probable, and any possible range of loss cannot be reasonably estimated[578] Mine Safety Disclosures This item is not applicable to the company - Not applicable[251] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Omnicell's common stock trades on NASDAQ (OMCL); the company has never paid dividends and did not repurchase shares in 2023 - The company's common stock is traded on the NASDAQ Global Select Market under the symbol "OMCL"[254] - Omnicell has never declared or paid cash dividends and does not expect to in the foreseeable future[255] - No shares of common stock were repurchased during the year ended December 31, 2023[260] 5-Year Cumulative Total Return Comparison | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Omnicell, Inc. | $100.00 | $133.44 | $195.98 | $294.64 | $82.33 | $61.45 | | NASDAQ Composite | $100.00 | $136.69 | $198.10 | $242.03 | $163.28 | $236.17 | | NASDAQ Health Care | $100.00 | $110.75 | $140.85 | $126.71 | $95.29 | $96.06 | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Omnicell's revenue declined 11% to $1.15 billion, resulting in a net loss, yet operating cash flow significantly improved to $181.1 million Results of Operations Total revenues decreased 11% to $1.15 billion in 2023, driven by lower product sales, partially offset by service revenue growth, leading to a $20.1 million pre-tax loss Total Revenues (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Product revenues | $708,561 | $903,222 | $(194,661) | (22)% | | Services and other revenues | $438,551 | $392,725 | $45,826 | 12% | | Total revenues | $1,147,112 | $1,295,947 | $(148,835) | (11)% | Gross Profit (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | Change ($) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Gross profit | $496,840 | $588,987 | $(92,147) | (16)% | | Gross margin | 43% | 45% | | | - Selling, general, and administrative expenses decreased by $51.7 million (11%) in 2023, primarily due to lower employee-related expenses, consulting fees, commissions, and freight costs[332] - The company recorded a provision for income taxes of $0.3 million on a loss before taxes of $20.1 million in 2023, resulting in a negative effective tax rate of 1%[335] Liquidity and Capital Resources Omnicell's cash position improved to $468.0 million in 2023, with operating cash flow significantly increasing to $181.1 million, supported by an undrawn $350.0 million credit facility Cash Position and Working Capital (in thousands) | | December 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Cash and cash equivalents | $467,972 | $330,362 | | Working capital | $559,779 | $453,366 | Summary of Cash Flows (in thousands) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $181,094 | $77,781 | | Net cash used in investing activities | $(55,016) | $(58,669) | | Net cash provided by (used in) financing activities | $23,420 | $(20,953) | - On October 10, 2023, the company entered into a Second Amended and Restated Credit Agreement, providing for a $350.0 million revolving credit facility expiring in 2028. As of December 31, 2023, there was no outstanding balance[342][343] Quantitative and Qualitative Disclosures About Market Risk Omnicell faces market risks from foreign currency fluctuations, primarily British Pound and Euro, and interest rate changes affecting its fixed-rate convertible notes - The company is exposed to foreign currency exchange rate fluctuations, with the most significant exposure related to the British Pound and the Euro. No foreign exchange forward contracts were outstanding as of December 31, 2023[359][360] - Interest rate risk exists through borrowing activities. The convertible senior notes have a fixed interest rate, but their fair value is impacted by market rate changes. The fair market value of the notes was $527.2 million as of December 31, 2023, compared to a carrying value of $569.7 million[361] Controls and Procedures Management and independent auditors concluded Omnicell's disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[366] - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2023, based on the COSO framework[368] - Deloitte & Touche LLP, the independent registered public accounting firm, issued an unqualified attestation report on the company's internal control over financial reporting as of December 31, 2023[369] Part III Part III incorporates information on directors, executive compensation, security ownership, and related party transactions by reference from the 2024 Proxy Statement Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, the audit committee, and the code of conduct is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's forthcoming Proxy Statement[376][377][378] Executive Compensation Information regarding director and executive officer compensation, Compensation Committee interlocks, and the Compensation Committee Report is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's forthcoming Proxy Statement[380] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as securities authorized for issuance under equity compensation plans, is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's forthcoming Proxy Statement[381] Certain Relationships, Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's forthcoming Proxy Statement[382][383] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the company's definitive Proxy Statement for the 2024 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's forthcoming Proxy Statement[383] Part IV Exhibits and Financial Statement Schedules This section lists consolidated financial statements, the independent auditor's report, and all exhibits filed with the Form 10-K - This item lists the consolidated financial statements and exhibits included as part of the Annual Report on Form 10-K[386] Financial Statements and Supplementary Data Reports of Independent Registered Public Accounting Firms Deloitte & Touche LLP issued unqualified opinions on Omnicell's 2023 financial statements and internal controls, noting critical audit matters in inventory and software capitalization - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements as of December 31, 2023[390] - The firm also issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[391][404] - The audit identified two Critical Audit Matters: Inventory Valuation, due to judgments on excess and slow-moving inventory, and Capitalized Software Development Costs, due to the subjectivity in determining which costs to capitalize[395][399] Consolidated Financial Statements Omnicell's 2023 consolidated financial statements show $2.23 billion in assets, a $20.4 million net loss on $1.15 billion revenue, and $181.1 million in operating cash flow Consolidated Balance Sheets (in thousands) | | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total current assets | $927,571 | $881,812 | | Total assets | $2,226,878 | $2,210,758 | | Total current liabilities | $367,792 | $428,446 | | Total liabilities | $1,037,924 | $1,080,621 | | Total stockholders' equity | $1,188,954 | $1,130,137 | Consolidated Statements of Operations (in thousands, except per share data) | | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | | :--- | :--- | :--- | | Total revenues | $1,147,112 | $1,295,947 | | Gross profit | $496,840 | $588,987 | | Income (loss) from operations | $(34,868) | $(2,323) | | Net income (loss) | $(20,371) | $5,648 | | Diluted net income (loss) per share | $(0.45) | $0.12 | Notes to Consolidated Financial Statements Notes detail Omnicell's accounting policies, debt, leases, and significant 2023 events including $15.5 million in restructuring expenses and ransomware incident costs - Revenue Recognition: Revenue for complex products is recognized upon installation and acceptance, while consumables revenue is recognized upon shipment. Services revenue is recognized over time[441][450] - Debt: The company has a $350.0 million revolving credit facility (undrawn at year-end) and $575.0 million in 0.25% convertible senior notes due 2025, with a net carrying value of $569.7 million[547][554][562] - Restructuring: The company recognized $15.5 million in employee-related restructuring expenses in 2023 related to headcount and real estate footprint reductions[621][622][623] - Ransomware Incident: As of Dec 31, 2023, the company has incurred $13.6 million in cumulative expenses related to the May 2022 ransomware incident, offset by $12.2 million in insurance recoveries[576]