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OMCL > SEC Filings for OMCL > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for OMNICELL, INC

Form 10-Q for OMNICELL, INC


8-Nov-2013

Quarterly Report


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. The forward looking statements are contained principally in the sections entitled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
• the extent and timing of future revenues, including the amounts of our current backlog, which represents firm orders that have not completed installation and therefore have not been recognized as revenue;

• the size or growth of our market or market share;

• the opportunity presented by new products or emerging markets;

• our expectations regarding our future backlog levels;

• our ability to align our cost structure and headcount with our current business expectations;

• the operating margins or earnings per share goals we may set;


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•            our ability to protect our intellectual property and operate our
             business without infringing upon the intellectual property rights of
             others;


•            our ability to generate cash from operations and our estimates
             regarding the sufficiency of our cash resources; and


•            our ability to acquire companies, businesses, products or
             technologies on commercially reasonable terms and integrate such
             acquisitions effectively.

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. We discuss many of these risks in this Quarterly Report on Form 10-Q in greater detail in Part II - Section 1A. "Risk Factors" below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should also read our Annual Report on Form 10-K and the documents that we reference in the Annual Report on Form 10-K and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect. All references in this report to "Omnicell, Inc.," "Omnicell," "our," "us," "we," or the "Company" collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future. Overview
We are a leading provider of automation and business information solutions enabling healthcare systems to streamline the medication administration process and manage costly medical supplies for increased operational efficiency and enhanced patient safety. Our automation, analytics and medication adherence solutions are designed to enable healthcare facilities to acquire, manage, dispense and administer medications and medical-surgical supplies and are intended to enhance patient safety, reduce medication errors, reduce operating costs, improve workflow, and increase operational efficiency.
Approximately 2,800 hospitals use one or more of our products, of which more than 1,800 hospitals in the United States have installed our automated hardware/software solutions for controlling, dispensing, acquiring, verifying, tracking and analyzing medications and medical and surgical supplies. Approximately 6,000 institutional and retail pharmacies use our medication adherence packaging solutions.
The medical industry has become increasingly aware that human factors inevitably create the risk of medication administration errors in the course of patient care.
The Institute of Medicine, a non-profit, non-governmental arm of the National Academies, published a report in 2006 that estimated that 1.5 million medication errors are made each year in the United States. Acute care facilities are required to adhere to medication regulatory controls that we believe cannot be adequately supported by manual tracking systems or partially automated systems. Nursing shortages add an additional challenge to acute care facilities to meet regulatory controls and improve patient safety while still providing adequate patient care. Non-acute care facilities face similar safety challenges. According to "Adherence to Long-Term Therapies-Evidence for Action," the World Health Organization has stated, "Across diseases, adherence is the single most important modifiable factor that compromises treatment outcome." U.S. health system thought leaders see medication adherence as a key requirement for closing the medication loop and delivering better clinical outcomes and financial results. Medication non-adherence is described as a critical problem creating approximately $290 billion in extra costs, according to the New England Healthcare Institute, resulting in approximately 125,000 deaths per year. In addition, the Centers for Medicare & Medicaid Services states that 11% of all hospital admissions are related to medication non-adherence.
We provide solutions to help healthcare systems and caregivers address these problems. We believe that our patient-centric medication and supply management solutions help improve workflow efficiencies and patient outcomes. Business Segments
Our business is organized into two operating business segments: Acute Care, which primarily includes products and services sold to hospital customers, and Non-Acute Care, which primarily includes products and services sold to customers outside of the hospital setting.


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Acute Care
In acute care facilities, our solutions use advanced, software­based medication control and tracking algorithms that interact with hardware security features, resulting in a system that provides both the pharmacist and the nurse real-time safety controls. Our solutions also go a step further by providing medication bar code verification at every step of the medication administration process, from entry to the hospital through to administration to a patient. Our systems enable our customers to reduce or eliminate inefficiencies such as manual tracking and reconciliations, nursing time spent in obtaining medications and in performing inventory control and extraneous process steps.
Similar to our medication solutions, our medical and surgical supply systems provide acute care hospitals control over consumable supplies critical to providing quality healthcare. Our solutions provide inventory control software that is designed to ensure critical supplies are always stocked in the right locations. At the same time, usage tracking helps hospital administrators to ensure that money is not wasted on excessive stores of supplies and helps optimize reimbursement by improving charge capture. Our systems automate the tracking of activities in perioperative areas such as the operating room and catheter lab, including tracking implantable tissue grafts for additional patient safety and regulatory compliance.
Additionally, we offer analytics and reporting software for pharmacists and material managers to more easily manage inventory flow, tracking and optimization. These reports are often used to identify hospital employees who may be improperly diverting pharmaceuticals stored in the automated dispensing cabinets. Such diversion or theft, especially of controlled substances, could result in black market sales or other illicit uses. Non-Acute Care
Our Non-Acute Care product lines were primarily added to our solutions through the acquisition of MTS Medication Technologies, Inc. ("MTS"), a worldwide provider of medication adherence packaging systems, and a wholly-owned Omnicell subsidiary. MTS manufactures proprietary medication dispensing systems and related products for use by institutional pharmacies servicing long-term care and correctional facilities and retail pharmacies servicing patients caring for themselves at home. These systems use consumable medication punch cards and specialized machines that allow the pharmacies to automatically or semi-automatically assemble, fill and seal drugs into medication punch cards representing a weekly or monthly supply of a patient's medication. The use of these cards and machines provides a cost-effective customized package personalized to the patient. The punch card medication dispensing system provides tamper evident packaging and promotes medication compliance. Our Non-Acute Care systems are used by institutional pharmacists to package medications into blister cards that form the backbone of medication control in non-acute care facilities. Our line of equipment provides solutions ranging from low cost semi-automated packaging systems to fully automated robotic systems that help eliminate human error and increase the efficiency of packaging medication for non-acute care facilities. Our OnDemand line of multi-medication packaging equipment can be used by retail pharmacies to provide enhanced packages that we believe increase the probability that patients will adhere to the medication regimen prescribed by their healthcare provider.
Our Non-Acute Care segment manufactures and sells consumable medication blister cards, packaging equipment and ancillary products, as well as automated dispensing equipment used in long term care facilities throughout the United States, Canada, Europe and Australia. This segment's customers are predominantly institutional and independent retail pharmacies that supply nursing homes, assisted living and correctional facilities with prescription medications for their patients. We manufacture our proprietary consumable blister cards and most of our packaging equipment in our own facilities. This manufacturing process uses integrated equipment for manufacturing the consumable medication blister cards. In addition, we utilize the services of contract manufacturers for some of our packaging equipment. We distribute products directly in the United Kingdom and in Germany through our subsidiaries in those countries. Our solutions are aligned with the long-term trends of the healthcare market to assist in the management of patient health across the continuum of care. Our key business strategies include:
• Further penetrating the existing market through providing differentiated, innovative solutions, which includes:

•Consistently innovating our product and service offerings; and
•Maintaining our flexibility in customer product design and in the installation process to provide solutions tailored to our customers.
• Increasing penetration of new markets by:


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•Bringing new products and technologies to market that are specific to international markets;
•Bringing new products and technologies to market that address currently unsolved problems;
•Establishing direct sales, distribution or other capabilities when and where it is appropriate;
• Partnering with companies that have sales, distribution or other capabilities that we do not possess; and

•Increasing customer awareness of safety issues in the administration of medications.
• Expanding our product offering through acquisitions and partnerships.

Operations During the Three and Nine Months Ended September 30, 2013

The consolidated operating results presented for the nine months ended September 30, 2013 and the nine months ended September 30, 2012, reflect the impact of the acquisition of MTS since May 21, 2012 as a part of the Non-Acute Care segment.

Revenues grew year-over-year for both product and services, with overall revenue growth of 11.5%, comparing $94.0 million for the third quarter of 2013 with $84.3 million for the third quarter of 2012. Overall revenue growth was 22.8% for the nine months ended September 30, 2013 comparing $274.8 million with $223.9 million for the same period in 2012. Much of the growth was a result of the acquisition of MTS, which now comprises a substantial portion of the Non-Acute Care segment, and whose prior year operating results were not included in our consolidated operating results prior to the date of acquisition.

For the three months ended September 30, 2013, the Non-Acute Care segment contributed $22.2 million and $1.2 million to the product and service revenue, respectively as compared to $18.7 million and $1.2 million during the same period in 2012. The Acute Care segment contributed revenues of $53.3 million and $17.3 million to product and service revenue respectively, for the three months ended September 30, 2013 as compared to $48.8 million and $15.6 million during the same period in 2012. Overall product and service gross margins increased by $6.0 million, or 12.9% for the three months ended September 30, 2013 as compared to the same period in 2012.

For the nine months ended September 30, 2013, the Non-Acute Care segment contributed $66.4 million and $3.7 million, respectively, to the overall product and service revenue as compared to $30.2 million and $2.3 million during the same period in 2012. The Acute Care segment contributed revenues of $153.9 million and $50.8 million to product and service revenue, respectively, for the nine months ended September 30, 2013 as compared to $145.0 million and $46.3 million during the same period in 2012. Overall product and service gross margins increased by $25.6 million, or 21.1% for the nine months ended September 30, 2013 as compared to the same period in 2012.

During the three months ended September 30, 2013, total revenue remained relatively flat at $94.0 million as compared with $93.7 million for the three months ended June 30, 2013 with service revenues accounting for the majority of this increase. Overall gross margins for the third quarter of 2013 increased to 55.3% from 52.7% in the three months ended June 30, 2013. Product gross margins increased to 55.0% on revenue of $75.5 million for the three months ended September 30, 2013 as compared with 52.0% on revenue of $75.6 million during the second quarter of 2013. Service gross margins also increased, to 56.7% on revenue of $18.5 million as compared to 55.6% on $18.1 million in revenue during the second quarter of 2013.

Cash, cash equivalents and short-term investments increased by $53.9 million during the nine months ended September 30, 2013, to $116.2 million from $62.3 million at December 31, 2012 primarily due to increased profitability, working capital improvements and cash received for shares issued under our stock option and employee stock purchase plans.

During the nine months ended September 30, 2013, we implemented a reorganization within our Non-Acute Care segment. This reorganization reduced headcount slightly and as a result, we incurred $0.7 million in severance and related expenses and an additional $0.4 million related to accelerated stock option vesting in the first quarter of 2013. This reorganization is intended to promote a stronger integration strategy, customer and segment focus, and future growth. As our business evolves, we will continue to assess our segments which could result in future modifications to the current presentation.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues


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and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions. We believe that the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

•Revenue recognition;
•Provision for allowances;
•Valuation and impairment of goodwill, other intangible assets and other long lived assets;
•Inventory;
•Valuation of share-based awards; and
•Accounting for income taxes.

During the nine months ended September 30, 2013, there were no significant changes in our critical accounting policies and estimates.

Please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2012 for a more complete discussion of our other critical accounting policies and estimates.

Recently Adopted Accounting Standards
In February 2013, FASB issued 2013-02, Comprehensive Income (Topic 220):
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI), which aims to improve the reporting of reclassifications out of AOCI. This update requires an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. We adopted this guidance in the first quarter of 2013. This update did not have any significant impact on our financial position, operating results or cash flows.


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Results of Operations
The table below shows the components of our consolidated results of operations
as percentages of total revenues for the three months and nine months ended
September 30, 2013 and 2012 (in thousands, except percentages):
                                                 Three Months Ended September 30,
                                                   2013                      2012
                                                            % of                   % of
                                               $          Revenue        $       Revenue
Revenues:
Product revenue                          $   75,508         80.3 %   $ 67,446      80.0 %
Service and other revenues                   18,531         19.7 %     16,885      20.0 %
Total revenues                               94,039        100.0 %     84,331     100.0 %
Cost of revenues:
Cost of product revenues                     33,977         36.1 %     30,636      36.3 %
Cost of service and other revenues            8,022          8.5 %      7,608       9.0 %
Total cost of revenues                       41,999         44.6 %     38,244      45.3 %
Gross profit                                 52,040         55.4 %     46,087      54.7 %
Operating expenses:
Research and development                      6,561          7.0 %      5,545       6.6 %
Selling, general and administrative          34,762         37.0 %     29,316      34.8 %
Total operating expenses                     41,323         44.0 %     34,861      41.4 %
Income from operations                       10,717         11.4 %     11,226      13.3 %
Interest and other income (expense), net         25            - %         34         - %
Income before provision for income taxes     10,742         11.4 %     11,260      13.3 %
Provision for income taxes                    2,987          3.2 %      4,340       5.1 %
Net income                               $    7,755          8.2 %   $  6,920       8.2 %


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                                                Nine Months Ended September 30,
                                                  2013                    2012
                                                         % of                    % of
                                              $        Revenue        $        Revenue
Revenues:
Product revenue                          $ 220,325       80.2 %   $ 175,239      78.3 %
Service and other revenues                  54,510       19.8 %      48,619      21.7 %
Total revenues                             274,835      100.0 %     223,858     100.0 %
Cost of revenues:
Cost of product revenues                   103,810       37.8 %      79,532      35.5 %
Cost of service and other revenues          24,250        8.8 %      23,114      10.3 %
Total cost of revenues                     128,060       46.6 %     102,646      45.8 %
Gross profit                               146,775       53.4 %     121,212      54.2 %
Operating expenses:
Research and development                    21,665        7.9 %      17,538       7.8 %
Selling, general and administrative        100,866       36.7 %      86,382      38.6 %
Total operating expenses                   122,531       44.6 %     103,920      46.4 %
Income from operations                      24,244        8.9 %      17,292       7.8 %
Interest and other income (expense), net      (134 )        - %          57         - %
Income before provision for income taxes    24,110        8.9 %      17,349       7.8 %
Provision for income taxes                   6,954        2.5 %       6,703       3.0 %
Net income                               $  17,156        6.4 %   $  10,646       4.8 %

The consolidated results presented above include the operating results of MTS since May 21, 2012, the date of acquisition and are included as part of the Non-Acute Care segment.

Effective in the second quarter of 2013, our management changed its methodology for allocating certain expenses to its reportable segments. We have reclassified segment operating results for the three and nine months ended September 30, 2012 to conform to the 2013 presentation.

Product Revenues, Cost of Product Revenues and Gross Profit

The table below shows our consolidated product revenues, cost of product
revenues and gross profit for the three months and nine months ended September
30, 2013 and 2012 and the percentage changes between those periods (in
thousands, except percentages):
                               Three Months Ended September 30,
                              2013               2012        % Change
Product revenues         $     75,508       $     67,446        12.0 %
Cost of product revenues       33,977             30,636        10.9 %
Gross profit             $     41,531       $     36,810        12.8 %
Gross margin                     55.0 %             54.6 %       0.4 %


                              Nine Months Ended September 30,
                              2013             2012       % Change
Product revenues         $    220,325       $ 175,239       25.7  %
Cost of product revenues      103,810          79,532       30.5  %
Gross profit             $    116,515       $  95,707       21.7  %

Gross margin 52.9 % 54.6 % (1.7 )%


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Product revenues increased by $8.1 million, or 12.0%, in the three months ended September 30, 2013 as compared to the same period in 2012. Product revenues increased by $45.1 million, or 25.7%, in the nine months ended September 30, 2013 as compared to the same period in 2012.

The overall increase in product revenues for the three months ended September 30, 2013 was primarily driven by increased installations of our automation products in both the Non-Acute Care and Acute Care segments. The Non-Acute Care segment contributed $22.2 million as compared with $18.7 million for the same period last year. Our Acute Care segment contributed $53.3 million in product revenue for the three months ended September 30, 2013 as compared to $48.8 million for the same period in 2012.

The overall increase in product revenues for the nine months ended September 30, 2013 was primarily driven by a full nine month contribution of MTS activities as a part of our Non-Acute Care segment, which contributed $66.4 million during the period. This compared to $30.2 million in the same nine month period in 2012. Our Acute Care segment contributed $153.9 million in product revenue for the nine months ended September 30, 2013 compared to $145.0 million in the same nine month period in 2012.

We anticipate our revenues will continue to increase in 2013 compared to the same periods in 2012, as we fulfill our existing orders. Additionally, year over year revenue growth for the remainder of 2013 will continue to benefit from the contribution of our Non-Acute Care segment, including those of MTS, which we began to consolidate on May 21, 2012. Our ability to continue to grow revenue is dependent on our ability to continue to obtain orders from customers, our ability to produce quality consumables to fulfill customer demand, the volume of installations we are able to complete and our ability to meet customer needs by providing a quality installation experience and our flexibility in manpower allocations among customers to complete installations on a timely basis. The timing of our product revenues for equipment is primarily dependent on when our customers' schedules allow for installations.

Cost of product revenues increased by $3.3 million, or 10.9%, in the three months ended September 30, 2013 as compared to the same period in 2012. Cost of product revenues increased by $24.3 million, or 30.5%, in the nine months ended September 30, 2013 as compared to the same period in 2012.

The Non-Acute Care segment contributed product costs of $12.8 million for the three months ended September 30, 2013. Our Acute Care product cost increased by $1.4 million to $21.2 million, which is primarily a function of changes in revenue and product mix.

The increase in cost of product revenues for the nine months ended September 30, . . .

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