NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Organization and Summary of Significant Accounting Policies
Business
Omnicell, Inc. was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. The Company’s major products and related services are medication management solutions and adherence tools for healthcare systems and pharmacies, which are sold in its principal market, the healthcare industry. The Company’s market is primarily located in the United States and Europe. “Omnicell” or the “Company” refer to Omnicell, Inc. and its subsidiaries, collectively.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of the Company as of September 30, 2024 and December 31, 2023, the results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2024 and 2023, and cash flows for the nine months ended September 30, 2024 and 2023. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 28, 2024. The Company’s results of operations and comprehensive income (loss) for the three and nine months ended September 30, 2024, and cash flows for the nine months ended September 30, 2024 are not necessarily indicative of results that may be expected for the year ending December 31, 2024, or for any future period.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying Notes. These estimates are based on historical experience and various other assumptions that management believes to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates.
The Company’s critical accounting policies are those that affect its financial statements materially and involve difficult, subjective, or complex judgments by management. As of September 30, 2024, the Company is not aware of any events or circumstances that would require an update to its estimates, judgments, or revisions to the carrying value of its assets or liabilities.
Segment Reporting
The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company’s Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company at the consolidated level using information about its revenues, gross profit, income from operations, and other key financial data. All significant operating decisions are based upon an analysis of the Company as one operating segment, which is the same as its reporting segment.
Recently Adopted Authoritative Guidance
There was no recently adopted authoritative guidance that is expected to have a material impact on the Company’s Condensed Consolidated Financial Statements through the reporting date.
In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires public entities to disclose significant segment expenses that are regularly provided to the CODM. Public entities with a single reportable segment are required to apply the disclosure requirements in ASU 2023-07, as well as all existing segment disclosures and reconciliation requirements in ASC 280, on an interim and annual basis. The amendments are effective for the Company’s annual periods beginning January 1, 2024, and for interim periods within fiscal years beginning January 1, 2025. Retrospective application is required, with early adoption permitted. The Company does not expect the adoption of ASU 2023-07 to have a material impact on its balance sheets, statements of operations, or statements of cash flows, as the anticipated changes will be the inclusion of additional disclosures related to the Company’s single reportable segment.
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures, which includes amendments that further enhance income tax disclosures, primarily through standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The amendments are effective for the Company’s annual periods beginning January 1, 2025, with early adoption permitted, and should be applied either prospectively or retrospectively. The Company is currently evaluating the impact ASU 2023-09 will have on its consolidated financial statements.
In March 2024, the SEC issued final rules under SEC Release No. 33-11275, “The Enhancement and Standardization of Climate-Related Disclosures for Investors,” to require registrants to disclose certain climate-related information, including Scope 1 and Scope 2 greenhouse gas emissions and other climate-related topics, if material, in registration statements and annual reports. In April 2024, the SEC voluntarily stayed its climate disclosure rules as a result of pending legal challenges to facilitate an orderly judicial resolution. The Company is currently evaluating the impact the SEC’s rule will have on its consolidated financial statements.
There was no other recently issued and effective authoritative guidance that is expected to have a material impact on the Company’s Condensed Consolidated Financial Statements through the reporting date.
Note 2. Revenues
Revenue Recognition
The Company earns revenues from sales of its products and related services, which are sold in the healthcare industry, its principal market. The Company’s customer arrangements typically include one or more of the following revenue categories:
Connected devices, software licenses, and other. Software-enabled connected devices and software licenses that manage and regulate the storage and dispensing of pharmaceuticals, consumables blister cards, and packaging equipment and other supplies. This revenue category is often sold through long-term, sole-source agreements. Solutions in this category include, but are not limited to, XT Series automated dispensing systems and products related to the Central Pharmacy Dispensing Service and IV Compounding Service.
Consumables. Medication adherence packaging, labeling, and other one-time use packaging including multimed adherence packaging and single dose blister cards, which are used by retail, community, and outpatient pharmacies, as well as by institutional pharmacies serving long-term care and other sites outside the acute care hospital, are designed to improve patient engagement and adherence to prescriptions.
Technical services. Post-installation technical support and other related services, including phone support, on-site service, parts, and access to unspecified software updates and enhancements, if and when available. This revenue category is often supported by multi-year or annual contractual agreements.
Advanced Services. Emerging software and service solutions which are offered on a subscription basis with fees typically based either on transaction volume or a fee over a specified period of time. Solutions in this category include, but are not limited to, EnlivenHealth®, Specialty Pharmacy Services, 340B solutions, Inventory Optimization Service, other software solutions, and services related to the Central Pharmacy Dispensing Service and IV Compounding Service.
The following table summarizes revenue recognition for each revenue category:
Revenue Category
Timing of Revenue Recognition
Income Statement Classification
Connected devices, software licenses, and other
Point in time, as transfer of control occurs, generally upon installation and acceptance by the customer
Product
Consumables
Point in time, as transfer of control occurs, generally upon shipment to, or receipt by, the customer
Product
Technical services
Over time, as services are provided, typically ratably over the service term
Service
Advanced Services
Over time, as services are provided
Service
A portion of the Company’s sales are made to customers who are members of Group Purchasing Organizations (“GPOs”) and Federal agencies that purchase under a Federal Supply Schedule Contract with the Department of Veterans Affairs (the “GSA Contract”). GPOs are often fully or partially owned by the Company’s customers, and the Company pays fees to the GPO on completed contracts. The Company also pays the Industrial Funding Fee (“IFF”) to the Department of Veterans Affairs under the GSA Contract. The Company considers these fees consideration paid to customers and records them as reductions to revenue. Fees to GPOs and the IFF were $2.5 million and $3.6 million for the three months ended September 30, 2024 and 2023, respectively, and $6.9 million and $9.5 million for the nine months ended September 30, 2024 and 2023, respectively.
Disaggregation of Revenues
The following table summarizes the Company’s revenues disaggregated by revenue type for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(In thousands)
Connected devices, software licenses, and other
$
135,672
$
167,560
$
381,280
$
500,182
Consumables
22,689
21,195
66,956
62,724
Technical services
59,583
57,303
177,419
167,851
Advanced Services
64,476
52,605
179,704
157,508
Total revenues
$
282,420
$
298,663
$
805,359
$
888,265
The following table summarizes the Company’s revenues disaggregated by geographic region, which is determined based on customer location, for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(In thousands)
United States
$
258,177
$
272,649
$
731,670
$
785,794
Rest of world (1)
24,243
26,014
73,689
102,471
Total revenues
$
282,420
$
298,663
$
805,359
$
888,265
_________________________________________________
(1) No individual country represented more than 10% of total revenues.
The following table reflects the Company’s contract assets and contract liabilities:
September 30, 2024
December 31, 2023
(In thousands)
Short-term unbilled receivables, net (1)
$
33,722
$
22,524
Long-term unbilled receivables, net (2)
9,171
11,850
Total contract assets
$
42,893
$
34,374
Short-term deferred revenues
$
152,367
$
121,734
Long-term deferred revenues
69,811
58,622
Total contract liabilities
$
222,178
$
180,356
_________________________________________________
(1) Included in accounts receivable and unbilled receivables in the Condensed Consolidated Balance Sheets.
(2) Included in other long-term assets in the Condensed Consolidated Balance Sheets.
The portion of the transaction price allocated to the Company’s unsatisfied performance obligations for which invoicing has occurred is recorded as deferred revenues.
Short-term deferred revenues of $121.7 million as of December 31, 2023 include deferred revenues from product sales and service contracts, net of deferred cost of sales of $12.4 million. During the three and nine months ended September 30, 2024, the Company recognized revenues of $21.6 million and $106.6 million, respectively, that were included in the corresponding gross short-term deferred revenues balance of $134.1 million as of December 31, 2023.
Deferred revenues from product sales primarily relate to delivered and invoiced products, pending installation and acceptance. Deferred revenues from service contracts primarily relate to services that have been invoiced, where services have not yet been provided. Short-term deferred revenues are expected to be recognized within the next twelve months. Long-term deferred revenues substantially consist of deferred revenues on long-term technical and Advanced Services contracts which have been invoiced and are expected to be recognized as revenue beyond twelve months, generally not more than ten years. The Company generally invoices customers for products upon shipment. Invoicing associated with the service portion of agreements is generally periodic and is billed on a monthly, quarterly, or annual basis, and in certain circumstances, multiple years are billed at one time. Advanced Services agreements are generally invoiced periodically on a monthly, quarterly or annual basis over the life of the agreement. In certain circumstances, portions of these agreements may be invoiced as a lump sum.
In addition, the Company has remaining performance obligations associated with contracts for which the associated products have been accepted or associated services have started, but where invoicing has not yet occurred and therefore are not reflected in deferred revenue. These remaining performance obligations are comprised of the non-variable portions of technical services and Advanced Services provided under non-cancellable contracts with minimum commitments. Remaining performance obligations which are not included in deferred revenues were $403.0 million as of September 30, 2024. Remaining performance obligations are expected to be recognized ratably over the remaining terms of the associated contracts, which terms vary but are generally not more than ten years. Remaining performance obligations do not include product obligations, services where the associated product has not been accepted, services which have not yet started, variable portions of services, and certain other obligations.
Significant Customers
There were no customers that accounted for more than 10% of the Company’s total revenues for the three and nine months ended September 30, 2024 and 2023. Also, there were no customers that accounted for more than 10% of the Company’s accounts receivable and unbilled receivables balances as of September 30, 2024 and December 31, 2023.
The basic and diluted net income (loss) per share calculations for the three and nine months ended September 30, 2024 and 2023 were as follows:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(In thousands, except per share data)
Net income (loss)
$
8,630
$
5,553
$
(3,311)
$
(5,996)
Weighted-average shares outstanding – basic
46,153
45,333
45,947
45,117
Effect of dilutive securities from stock award plans
274
262
—
—
Weighted-average shares outstanding – diluted
46,427
45,595
45,947
45,117
Net income (loss) per share – basic
$
0.19
$
0.12
$
(0.07)
$
(0.13)
Net income (loss) per share – diluted
$
0.19
$
0.12
$
(0.07)
$
(0.13)
Anti-dilutive weighted-average shares related to stock award plans
2,687
2,727
3,767
3,536
Anti-dilutive weighted-average shares related to convertible senior notes and warrants
11,816
11,816
11,816
11,816
Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $570.6 million and $468.0 million as of September 30, 2024 and December 31, 2023, respectively, consisted of bank accounts and highly-liquid U.S. Government money market funds held in sweep and asset management accounts with financial institutions of high credit quality. As of September 30, 2024 and December 31, 2023, cash equivalents were $535.2 million and $451.0 million, respectively, which consisted of money market funds held in sweep and asset management accounts.
Fair Value Hierarchy
The Company measures its financial instruments at fair value. The Company’s cash, cash equivalents, and restricted cash are classified within Level 1 of the fair value hierarchy as they are valued primarily using quoted market prices utilizing market observable inputs. The Company’s credit facility is classified within Level 2 as the valuation inputs are based on quoted prices or market observable data of similar instruments. The Company’s convertible senior notes are classified within Level 2 as the valuation inputs are based on quoted prices in an inactive market on the last day in the reporting period. As of September 30, 2024 and December 31, 2023, the fair value of the convertible senior notes was $548.8 million and $527.2 million, respectively, compared to their carrying values of $572.0 million and $569.7 million, respectively, which are net of unamortized debt issuance costs. Refer to Note 9, Debt and Credit Agreement, for further information regarding the Company’s credit facility and Note 10, Convertible Senior Notes, for further information regarding the Company’s convertible senior notes.
Balance sheet details as of September 30, 2024 and December 31, 2023 are presented in the tables below:
September 30, 2024
December 31, 2023
(In thousands)
Inventories:
Raw materials
$
37,638
$
51,439
Work in process
2,531
1,327
Finished goods
54,890
57,333
Total inventories
$
95,059
$
110,099
Other current assets:
Funds held for customers, including restricted cash (1)
$
31,849
$
43,649
Net investment in sales-type leases, current portion
11,699
11,867
Prepaid income taxes
2,233
8,279
Other current assets (2)
19,146
7,714
Total other current assets
$
64,927
$
71,509
Other long-term assets:
External-use software development costs, net
$
59,557
$
66,659
Unbilled receivables, net
9,171
11,850
Deferred debt issuance costs
3,134
3,718
Other long-term assets
9,872
8,239
Total other long-term assets
$
81,734
$
90,466
Accrued liabilities:
Operating lease liabilities, current portion
$
10,615
$
10,518
Customer fund liabilities
31,849
43,649
Advance payments from customers
8,941
10,551
Rebate liabilities
58,079
51,277
Group purchasing organization fees
4,859
4,445
Taxes payable
2,842
2,191
Other accrued liabilities
27,068
26,645
Total accrued liabilities
$
144,253
$
149,276
_________________________________________________
(1) Includes restricted cash of $22.3 million and $33.0 million as of September 30, 2024 and December 31, 2023, respectively.
(2) Includes deferred cost of sales of $13.7 million as of September 30, 2024.
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), which consisted of foreign currency translation adjustments, for the three and nine months ended September 30, 2024 and 2023:
The following table represents the property and equipment balances as of September 30, 2024 and December 31, 2023:
September 30, 2024
December 31, 2023
(In thousands)
Equipment
$
99,491
$
95,996
Furniture and fixtures
5,312
4,500
Leasehold improvements
17,996
17,919
Purchased software and internal-use software development costs
141,082
118,004
Construction in progress
9,119
11,614
Property and equipment, gross
273,000
248,033
Accumulated depreciation and amortization
(161,256)
(139,432)
Total property and equipment, net
$
111,744
$
108,601
Depreciation and amortization expense of property and equipment was $8.6 million and $6.7 million for the three months ended September 30, 2024 and 2023, respectively, and $25.9 million and $19.6 million for the nine months ended September 30, 2024 and 2023, respectively.
The geographic location of the Company’s property and equipment, net, is based on the physical location in which it is located. The following table summarizes the geographic information for property and equipment, net, as of September 30, 2024 and December 31, 2023:
September 30, 2024
December 31, 2023
(In thousands)
United States
$
107,551
$
104,312
Rest of world
4,193
4,289
Total property and equipment, net
$
111,744
$
108,601
Note 7. External-Use Software Development Costs
The carrying amounts of external-use software development costs as of September 30, 2024 and December 31, 2023 were as follows:
September 30, 2024
December 31, 2023
(In thousands)
Gross carrying amount
$
245,155
$
239,038
Accumulated amortization
(185,598)
(172,379)
External-use software development costs, net (1)
$
59,557
$
66,659
_________________________________________________
(1) Included in other long-term assets in the Condensed Consolidated Balance Sheets.
The Company recorded $6.0 million and $7.1 million to cost of revenues for amortization of external-use software development costs for the three months ended September 30, 2024 and 2023, respectively, and $19.1 million and $21.9 million for the nine months ended September 30, 2024 and 2023, respectively.
(1) The differences in gross carrying amounts between periods are primarily due to the write-off of certain fully amortized intangible assets.
Amortization expense of intangible assets was $5.6 million and $7.7 million for the three months ended September 30, 2024 and 2023, respectively, and $17.3 million and $24.1 million for the nine months ended September 30, 2024 and 2023, respectively.
The estimated future amortization expenses for amortizable intangible assets were as follows:
September 30, 2024
(In thousands)
Remaining three months of 2024
$
5,526
2025
21,002
2026
18,087
2027
16,269
2028
15,184
Thereafter
117,901
Total
$
193,969
Note 9. Debt and Credit Agreement
On November 15, 2019, Omnicell, Inc. entered into an Amended and Restated Credit Agreement (as amended, the “Prior A&R Credit Agreement”) with the lenders from time to time party thereto, Wells Fargo Securities, LLC, Citizens Bank, N.A., and JPMorgan Chase Bank, N.A., as joint lead arrangers, and Wells Fargo Bank, National Association, as administrative agent. As referred to herein, “Omnicell, Inc.” refers only to Omnicell, Inc., excluding its subsidiaries. The Prior A&R Credit Agreement provided for (a) a five-year revolving credit facility of $500.0 million (the “Prior Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to $250.0 million (the “Prior Incremental Facility”). In addition, the Prior A&R Credit Agreement included a letter of credit sub-limit of up to $15.0 million and a swing line loan sub-limit of up to $25.0 million. The Prior A&R Credit Agreement was subsequently amended on September 22, 2020 and March 29, 2023, to permit the issuance of the convertible senior notes and the purchase of the convertible note hedge transactions (as described in Note 10, Convertible Senior Notes, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q), expand the Company’s flexibility to make restricted payments (including common stock repurchases), and replace the total net leverage covenant, as well as to remove and replace the interest rate benchmark based on the London interbank offered rate (“LIBOR”) and related LIBOR-based mechanics with an interest rate benchmark based on the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York and related SOFR-based mechanics.
Omnicell, Inc. entered into a Second Amended and Restated Credit Agreement (the “Second A&R Credit Agreement”) on October 10, 2023, with the lenders from time to time party thereto, Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., PNC Capital Markets LLC and TD Securities (USA) LLC as joint lead arrangers and Wells Fargo Bank, National Association, as administrative agent. The Second A&R Credit Agreement supersedes the Prior A&R Credit Agreement and provides for (a) a five-year revolving credit facility of $350.0 million (the “Current Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to an amount equal to the sum of (i) the greater of $250.0 million and 100% of the adjusted consolidated EBITDA for the last four quarters and (ii) additional amounts subject to pro forma compliance with certain consolidated secured net leverage ratio (the “Current Incremental Facility”). In addition, the Second A&R Credit Agreement includes a letter of credit sub-limit of up to $15.0 million and a swing line loan sub-limit of up to $25.0 million. The Second A&R Credit Agreement has an expiration date of October 10, 2028, subject to acceleration under certain conditions, upon which date all remaining outstanding borrowings will be due and payable.
Loans under the Current Revolving Credit Facility bear interest, at Omnicell, Inc.’s option, at a rate equal to either (a) the Adjusted Term SOFR (as defined in the Second A&R Credit Agreement), plus an applicable margin ranging from 1.50% to 2.25% per annum based on the Company’s Consolidated Total Net Leverage Ratio (as defined in the Second A&R Credit Agreement), or (b) an alternate base rate equal to the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, and (iii) the Adjusted Term SOFR for an interest period of one month plus 1.00%, plus an applicable margin ranging from 0.50% to 1.25% per annum based on the Company’s Consolidated Total Net Leverage Ratio. Undrawn commitments under the Current Revolving Credit Facility are subject to a commitment fee ranging from 0.20% to 0.35% per annum based on the Company’s Consolidated Total Net Leverage Ratio on the average daily unused portion of the Current Revolving Credit Facility. Subject to the terms and conditions of the Current Revolving Credit Facility or Current Incremental Facility Omnicell, Inc. is permitted to
make voluntary prepayments at any time without payment of a premium or penalty. The availability of funds under the Current Revolving Credit Facility may be subject to reduction in order to maintain compliance with the financial covenants under the Second A&R Credit Agreement.
The Second A&R Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, dividends, and other distributions. The Second A&R Credit Agreement contains financial covenants that require the Company to not exceed a maximum consolidated secured net leverage ratio (not to exceed 3.00:1) and maintain a minimum consolidated interest coverage ratio (not to be less than 3.00:1). In addition, the Second A&R Credit Agreement contains certain customary events of default including, but not limited to, failure to pay interest, principal, and fees, or other amounts when due, material misrepresentations or misstatements in any representation or warranty, covenant defaults, certain cross defaults to other material indebtedness, certain judgment defaults, and events of bankruptcy.
Omnicell, Inc.’s obligations under the Second A&R Credit Agreement and, at the election of Omnicell, Inc. and the contracting counterparty, any secured swap obligations and banking services obligations owing to a lender (or an affiliate of a lender) are guaranteed by certain of its domestic subsidiaries and secured by substantially all of its and such subsidiary guarantors’ assets. In connection with entering into the Second A&R Credit Agreement, and as a condition precedent to borrowing loans thereunder, Omnicell, Inc. and certain of Omnicell, Inc.’s other direct and indirect subsidiaries have entered into certain ancillary agreements, including, but not limited to, a reaffirmation agreement, which amends certain terms of the existing collateral agreement and reaffirms their obligations under the existing guaranty agreement.
The refinancing of the Prior Credit Agreement on October 10, 2023 was evaluated in accordance with ASC 470-50, Debt -Modifications and Extinguishments. In determining whether the refinancing was to be accounted for as a debt extinguishment or a debt modification, the Company considered whether lenders within the syndicate remained the same or changed and whether the changes in debt terms were substantial. This assessment was performed on an individual lender basis within the syndicate. As a result, the refinancing was accounted for as a modification with the exception of certain lenders that exited the syndicate. The exit of certain lenders resulted in an immaterial write-off of existing unamortized debt issuance costs. The remaining unamortized debt issuance costs related to debt modification, along with the new deferred costs, will be amortized over the remaining term of the Second A&R Credit Agreement. The Company incurred and capitalized an additional $3.0 million of debt issuance costs which are being amortized to interest expense using the straight-line method through 2028.
As of both September 30, 2024 and December 31, 2023, the Company had $350.0 million of funds available under the Current Revolving Credit Facility. As of September 30, 2024 and December 31, 2023, the Company had no outstanding balance under the Current Revolving Credit Facility. The Company was in compliance with all covenants as of September 30, 2024.
Note 10. Convertible Senior Notes
0.25% Convertible Senior Notes due 2025
On September 25, 2020, the Company completed a private offering of $575.0 million aggregate principal amount of 0.25% convertible senior notes (the “Notes”), including the exercise in full of the initial purchasers’ option to purchase up to an additional $75.0 million principal amount of the Notes. The Company received proceeds from the issuance of the Notes of $559.7 million, net of $15.3 million of transaction fees and other debt issuance costs. The Notes bear interest at a rate of 0.25% per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2021. The Notes were issued pursuant to an indenture, dated September 25, 2020 (the “Indenture”), between the Company and U.S. Bank National Association, as trustee. The Notes are general senior, unsecured obligations of the Company and will mature on September 15, 2025, unless earlier redeemed, repurchased, or converted.
The Notes are convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding May 15, 2025, only under the following circumstances: (i) during any fiscal quarter commencing after the fiscal quarter ended on December 31, 2020 (and only during such fiscal quarter), if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price for the Notes on each applicable trading day; (ii) during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate for the Notes on each such trading day; (iii) if the Company calls such Notes for redemption, at any time prior to the close of business on the scheduled trading day immediately preceding the redemption date, but only with respect to the Notes called (or deemed called) for redemption; and (iv) upon the occurrence of specified corporate events, as specified in the Indenture. On or after May 15, 2025 until the close of business on
the second scheduled trading day immediately preceding the maturity date, holders of the Notes may convert all or any portion of their Notes at any time, regardless of the foregoing conditions.
During the three months ended September 30, 2024 and December 31, 2023, none of the conditional conversion features of the Notes were triggered, and therefore, the Notes are not convertible during the fourth quarter of 2024, commencing on October 1, 2024, and were not convertible during the first quarter of 2024, commencing on January 1, 2024. As such, the Company classified the Notes as a long-term liability in its Condensed Consolidated Financial Statements as of December 31, 2023. As the Notes will mature on September 15, 2025, the Company classified the Notes as a current liability as of September 30, 2024. Whether the Notes will be convertible following the fourth fiscal quarter of 2024 will depend on the satisfaction of the conversion conditions in the future.
Under the original terms of the Indenture, upon conversion, the Company could satisfy its conversion obligation by paying or delivering cash, shares of its common stock, or a combination thereof, at the Company’s election, in the manner and subject to the terms and conditions provided in the Indenture. On December 13, 2021, the Company irrevocably elected to fix its settlement method to a combination of cash and shares of the Company’s common stock with the specified cash amount per $1,000 principal amount of Notes of at least $1,000. As a result, for Notes converted on or after December 13, 2021, a converting noteholder will receive (i) up to $1,000 in cash per $1,000 principal amount of Notes and (ii) cash and/or shares of the Company’s common stock, at the Company’s option for any conversion consideration in excess of $1,000. In addition, the Company continues to have the ability to set the specified cash amount per $1,000 principal amount of Notes above $1,000. The initial conversion rate for the Notes is 10.2751 shares of the Company’s common stock per $1,000 principal amount of Notes, which is equivalent to an initial conversion price of approximately $97.32 per share of the Company’s common stock, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. In addition, following certain corporate events that could occur prior to the maturity date of the Notes or if the Company delivers a notice of redemption in respect of the Notes, the Company will, under certain circumstances, increase the conversion rate of the Notes for a holder who elects to convert its Notes (or any portion thereof) in connection with such a corporate event or convert its Notes called (or deemed called) for redemption during the related redemption period (as defined in the Indenture), as the case may be.
If the Company undergoes a fundamental change, holders may require, subject to certain exceptions, the Company to repurchase for cash all or any portion of their Notes at a fundamental change repurchase price equal to 100% of the principal amount of the Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. As of September 30, 2024, none of the criteria for a fundamental change or a conversion rate adjustment had been met.
As of September 30, 2024, the Company may redeem for cash all or any portion of the Notes, at its option, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price for the Notes then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period (including the last trading day of such period) ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. If the Company redeems less than all of the outstanding Notes, at least $150.0 million aggregate principal amount of Notes must be outstanding and not subject to redemption as of the date of the relevant notice of redemption. No sinking fund is provided for in the Notes.
The debt issuance costs associated with the Notes are being amortized to interest expense over the term of the Notes using an effective interest rate of 0.80%. As of September 30, 2024, the remaining life of the Notes and the related issuance cost accretion is approximately 1.0 year.
The maximum number of shares issuable upon conversion, including the effect of a fundamental change and subject to other conversion rate adjustments, would be 5.9 million shares. As of September 30, 2024, the if-converted value of the Notes did not exceed the principal amount.
The Notes consisted of the following balances reported in the Condensed Consolidated Balance Sheets as of September 30, 2024 and December 31, 2023:
The following table summarizes the components of interest expense resulting from the Notes recognized in interest and other income (expense), net in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(In thousands)
Contractual coupon interest
$
359
$
359
$
1,078
$
1,078
Amortization of debt issuance costs
$
780
$
773
$
2,335
$
2,316
Convertible Note Hedge and Warrant Transactions
In connection with the issuance of the Notes in September 2020, the Company entered into convertible note hedge and warrant transactions with an affiliate of one of the initial purchasers of the Notes and certain other financial institutions (the “option counterparties”) with respect to the Company’s common stock.
The convertible note hedge consists of an option for the Company to purchase up to approximately 5.9 million shares of the Company’s common stock, which is equal to the number of shares of the Company’s common stock underlying the Notes, at an initial strike price of approximately $97.32 per share. The convertible note hedge will expire upon the maturity of the Notes, if not earlier exercised or terminated. The cost of the convertible note hedge was approximately $100.6 million and was accounted for as an equity instrument, which was recorded in additional paid-in capital in the Condensed Consolidated Balance Sheets. The Company recorded a deferred tax asset of $25.8 million at issuance related to the convertible note hedge transaction. The convertible note hedge is expected generally to reduce the potential dilution to the Company’s common stock upon any conversion of Notes and/or offset any cash payments the Company is required to make in excess of the principal amount of converted Notes.
Separately from the convertible note hedge, in September 2020, the Company entered into warrant transactions to sell to the option counterparties warrants to acquire, subject to customary anti-dilution adjustments, up to approximately 5.9 million shares of its common stock in the aggregate at an initial strike price of $141.56 per share. The warrants require net share or net cash settlement upon the Company’s election. The Company received aggregate proceeds of approximately $51.3 million for the issuance of the warrants, which was recorded in additional paid-in capital at issuance in the Condensed Consolidated Balance Sheets. The warrants could separately have a dilutive effect to the Company’s common stock to the extent that the market price per share of its common stock exceeds the strike price of the warrants.
Note 11. Lessor Leases
Sales-Type Leases
The Company enters into non-cancelable sales-type lease arrangements with the leases varying in length from one to ten years. The Company optimizes cash flows by selling a majority of its sales-type leases, other than those relating to U.S. government hospitals and Advanced Services products, including Central Pharmacy Dispensing Service and IV Compounding Service, to third-party leasing finance companies on a non-recourse basis. The Company has no obligation to the leasing company once the lease has been sold.
The following table presents the Company’s income recognized from sales-type leases for the three and nine months ended September 30, 2024 and 2023:
The receivables as a result of these types of transactions are collateralized by the underlying equipment leased and consist of the following components at September 30, 2024 and December 31, 2023:
September 30, 2024
December 31, 2023
(In thousands)
Net minimum lease payments to be received
$
74,595
$
65,017
Less: Unearned interest income portion
(12,321)
(10,196)
Net investment in sales-type leases
62,274
54,821
Less: Current portion (1)
(11,699)
(11,867)
Long-term investment in sales-type leases, net
$
50,575
$
42,954
_________________________________________________
(1) The current portion of the net investment in sales-type leases is included in other current assets in the Condensed Consolidated Balance Sheets.
The carrying amount of the Company’s sales-type lease receivables is a reasonable estimate of fair value.
The maturity schedule of future minimum lease payments under sales-type leases retained in-house and the reconciliation to the net investment in sales-type leases reported on the Condensed Consolidated Balance Sheets was as follows:
September 30, 2024
(In thousands)
Remaining three months of 2024
$
3,795
2025
14,238
2026
12,627
2027
11,080
2028
10,094
Thereafter
22,761
Total future minimum sales-type lease payments
74,595
Present value adjustment
(12,321)
Total net investment in sales-type leases
$
62,274
Operating Leases
The following table represents the Company’s income recognized from operating leases for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(In thousands)
Rental income
$
1,230
$
1,330
$
2,797
$
5,459
Note 12. Lessee Leases
The Company has operating leases for office buildings, data centers, office equipment, and vehicles. The Company’s leases have initial terms of one to twelve years. As of September 30, 2024, the Company did not have any additional material operating leases that were entered into, but not yet commenced.
The maturity schedule of future minimum lease payments under operating leases and the reconciliation to the operating lease liabilities reported on the Condensed Consolidated Balance Sheets was as follows:
September 30, 2024
(In thousands)
Remaining three months of 2024
$
3,296
2025
12,432
2026
11,561
2027
9,557
2028
8,193
Thereafter
2,271
Total operating lease payments
47,310
Present value adjustment
(5,171)
Total operating lease liabilities (1)
$
42,139
_________________________________________________
(1) Amount consists of a current and long-term portion of operating lease liabilities of $10.6 million and $31.5 million, respectively. The current portion of the operating lease liabilities is included in accrued liabilities in the Condensed Consolidated Balance Sheets.
Operating lease costs were $2.5 million and $2.6 million for the three months ended September 30, 2024 and 2023, respectively, and $7.7 million and $8.2 million for the nine months ended September 30, 2024 and 2023, respectively. Short-term lease costs and variable lease costs were not material for the three and nine months ended September 30, 2024 and 2023. The Company recorded impairment and abandonment charges to operating lease right-of-use assets of $7.8 million during the nine months ended September 30, 2023, in connection with restructuring activities to reduce its real estate footprint and for optimization of certain leased facilities. The impairment and abandonment charges were recorded to selling, general, and administrative expenses on the Company’s Condensed Consolidated Statements of Operations. Refer to Note 16, Restructuring Expenses, for additional information regarding the Company’s restructuring activities.
The following table summarizes supplemental cash flow information related to the Company’s operating leases for the nine months ended September 30, 2024 and 2023:
Nine Months Ended September 30,
2024
2023
(In thousands)
Cash paid for amounts included in the measurement of lease liabilities
$
9,891
$
10,100
Right-of-use assets obtained in exchange for new lease liabilities
$
5,831
$
1,758
The following table summarizes the weighted-average remaining lease term and weighted-average discount rate related to the Company’s operating leases as of September 30, 2024 and December 31, 2023:
September 30, 2024
December 31, 2023
Weighted-average remaining lease term, years
4.0
4.6
Weighted-average discount rate, %
5.8
%
5.8
%
Note 13. Commitments and Contingencies
Purchase Obligations
In the ordinary course of business, the Company issues purchase orders based on its current manufacturing needs. As of September 30, 2024, the Company had non-cancelable purchase commitments of $111.2 million, of which $71.4 million are expected to be paid within the year ending December 31, 2024.
Legal Proceedings
The Company is currently involved in various legal proceedings.
As required under ASC 450, Contingencies, the Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss. The Company has not recorded any material accrual for contingent liabilities associated with any current legal proceedings based on its belief that any potential material loss, while reasonably possible, is not probable. Furthermore, any possible range of loss in such matters cannot be reasonably estimated at this time. The Company believes that it has valid defenses with respect to legal proceedings pending against it. However, litigation is inherently unpredictable, and it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of legal proceedings or because of the diversion of management’s attention and the creation of significant expenses, regardless of outcome.
The Company is not a party to any legal proceedings that management believes may have a material impact on the Company’s financial position or results of operations.
Note 14. Income Taxes
The Company generally provides for income taxes in interim periods based on the estimated annual effective tax rate for the year, adjusting for discrete items in the quarter in which they arise. For the nine months ended September 30, 2024 and September 30, 2023, the Company recorded a provision for income taxes of $5.3 million and $4.4 million, respectively, by applying its estimated annual effective tax rate to its year-to-date measure of ordinary income and adjusted for $4.9 million and $5.6 million, respectively, of discrete income tax expense primarily from equity compensation.
The effective tax rate for the nine months ended September 30, 2024 and 2023, differed from the statutory rate of 21% primarily due to the benefit of the research and development credits and a foreign-derived intangible income (“FDII”) benefit deduction, partially offset by the unfavorable impact of the non-deductible compensation and equity charges.
The Organization for Economic Co-Operation and Development (“OECD”) introduced Base Erosion and Profit Shifting (“BEPS”) Pillar Two rules that impose a global minimum tax rate of 15% on multi-national corporations. The rules are effective for the Company’s financial year beginning January 1, 2024. These rules did not have an impact on the Company’s provision for income taxes for the nine months ended September 30, 2024.
As of September 30, 2024 and December 31, 2023, the Company had gross unrecognized tax benefits of $11.5 million and $10.7 million, respectively. The Company recognizes interest and penalties related to uncertain tax positions in interest and other income (expense), net in the Condensed Consolidated Statements of Operations. Accrued interest and penalties are included within other long-term liabilities on the Condensed Consolidated Balance Sheets. As of September 30, 2024 and December 31, 2023, the amount of accrued interest and penalties was $0.8 million and $0.4 million, respectively.
The Company files income tax returns in the United States and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities, including major jurisdictions such as the United States, Germany, Italy, France, and the United Kingdom. With few exceptions, as of September 30, 2024, the Company was no longer subject to U.S., state, and foreign tax examinations for years before 2020, 2019, and 2019, respectively.
Although the Company believes it has adequately provided for unrecognized tax benefits, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. It is not possible at this time to reasonably estimate changes in the unrecognized tax benefits within the next twelve months.
Note 15. Employee Benefits and Share-Based Compensation
Share-Based Compensation Expense
The following table sets forth the total share-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023:
The Company capitalized approximately $1.0 million and $1.1 million during the three months ended September 30, 2024 and 2023, respectively, and $2.7 million and $3.3 million during the nine months ended September 30, 2024 and 2023, respectively, of non-cash share-based compensation expense to internal-use and external-use software development costs related to internal labor. The Company did not capitalize any material share-based compensation expense to inventory during the three and nine months ended September 30, 2024 and 2023.
Employee Stock Purchase Plan (“ESPP”)
The following assumptions were used to value shares under the ESPP for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
Expected life, years
0.5 - 2.0
0.5 - 2.0
0.5 - 2.0
0.5 - 2.0
Expected volatility, %
33.7% - 58.7%
32.0% - 63.9%
33.7% - 58.7%
31.7% - 63.9%
Risk-free interest rate, %
3.2% - 5.3%
0.2% - 5.5%
1.5% - 5.5%
0.1% - 5.5%
Dividend yield, %
—
%
—
%
—
%
—
%
For the nine months ended September 30, 2024 and 2023, employees purchased approximately 524,000 and 353,000 shares of common stock, respectively, under the ESPP at a weighted-average price of $24.14 and $46.68, respectively. As of September 30, 2024, the unrecognized compensation cost related to the shares to be purchased under the ESPP was approximately $0.6 million and is expected to be recognized over a weighted-average period of 1.6 years.
Stock Options
The following assumptions were used to value stock options granted pursuant to the Company’s 2009 Equity Incentive Plan, as amended (the “2009 Plan”) for the nine months ended September 30, 2023. There were no stock options granted during the three and nine months ended September 30, 2024 or the three months ended September 30, 2023.
Nine Months Ended September 30,
2023
Expected life, years
3.2
Expected volatility, %
44.8
%
Risk-free interest rate, %
3.7
%
Estimated forfeiture rate, %
10.0
%
Dividend yield, %
—
%
The following table summarizes the stock option activity under the 2009 Plan during the nine months ended September 30, 2024:
Number of Shares
Weighted-Average Exercise Price
Weighted-Average Remaining Years
Aggregate Intrinsic Value
(In thousands, except per share data)
Outstanding at December 31, 2023
2,023
$
67.68
4.6
$
1,013
Granted
—
—
Exercised
(16)
30.54
Expired
(209)
73.50
Forfeited
(23)
63.93
Outstanding at September 30, 2024
1,775
$
67.38
4.1
$
2,399
Exercisable at September 30, 2024
1,762
$
66.97
4.0
$
2,399
Vested and expected to vest at September 30, 2024 and thereafter
As of September 30, 2024, total unrecognized compensation cost related to unvested stock options was $0.3 million, which is expected to be recognized over a weighted-average vesting period of 0.4 years.
Restricted Stock Units (“RSUs”)
The following table summarizes the RSU activity under the 2009 Plan during the nine months ended September 30, 2024:
Number of Shares
Weighted-Average Grant Date Fair Value
Weighted-Average Remaining Years
Aggregate Intrinsic Value
(In thousands, except per share data)
Outstanding at December 31, 2023
1,078
$
84.66
1.5
$
40,551
Granted (Awarded)
1,023
40.04
Vested (Released)
(297)
88.81
Forfeited
(130)
78.53
Outstanding and unvested at September 30, 2024
1,674
$
57.13
1.7
$
72,966
As of September 30, 2024, total unrecognized compensation cost related to RSUs was $62.5 million, which is expected to be recognized over the remaining weighted-average vesting period of 3.2 years.
Restricted Stock Awards (“RSAs”)
The following table summarizes the RSA activity under the 2009 Plan during the nine months ended September 30, 2024:
Number of Shares
Weighted-Average Grant Date Fair Value
(In thousands, except per share data)
Outstanding at December 31, 2023
24
$
70.96
Granted (Awarded)
51
31.94
Vested (Released)
(26)
67.32
Outstanding and unvested at September 30, 2024
49
$
31.91
As of September 30, 2024, total unrecognized compensation cost related to RSAs was $0.8 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.6 years.
Performance-Based Stock Unit Awards (“PSUs”)
The following table summarizes the PSU activity under the 2009 Plan during the nine months ended September 30, 2024:
Number of Shares
Weighted-Average Grant Date Fair Value
(In thousands, except per share data)
Outstanding at December 31, 2023
75
$
127.14
Granted (Awarded)
177
28.67
Vested (Released)
(5)
157.56
Forfeited
(65)
122.29
Outstanding and unvested at September 30, 2024
182
$
32.33
As of September 30, 2024, total unrecognized compensation cost related to PSUs was approximately $3.9 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.6 years.
Summary of Shares Reserved for Future Issuance under Equity Incentive Plans
The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of September 30, 2024:
Number of Shares
(In thousands)
Stock options outstanding
1,775
Non-vested restricted stock awards
1,905
Shares authorized for future issuance
3,396
ESPP shares available for future issuance
2,726
Total shares reserved for future issuance
9,802
Stock Repurchase Programs
On August 2, 2016, the Company’s Board of Directors (the “Board”) authorized a stock repurchase program, which does not expire, providing for the repurchase of up to $50.0 million of the Company’s common stock (the “2016 Repurchase Program”). As of September 30, 2024, the maximum dollar value of shares that may yet be purchased under the 2016 Repurchase Program was $2.7 million.
The timing, price, and volume of repurchases are to be based on market conditions, relevant securities laws, and other factors. The stock repurchases may be made from time to time on the open market, in privately negotiated transactions, or pursuant to a Rule 10b-18 plan, subject to the terms and conditions of the Second A&R Credit Agreement, as amended. The 2016 Repurchase Program does not obligate the Company to repurchase any specific number of shares, and the Company may terminate or suspend the 2016 Repurchase Program at any time.
During the three and nine months ended September 30, 2024 and 2023, the Company did not repurchase any of its outstanding common stock under the 2016 Repurchase Program.
Note 16. Restructuring Expenses
On November 23, 2022, the Company committed to a plan to reduce the Company’s headcount (the “2022 Plan”), as part of the Company’s expense containment efforts being implemented due to ongoing macroeconomic headwinds. During the first quarter of 2023, as a result of continued exploration of expense containment measures, the Company committed to further reduce its headcount across many of its functions, and also committed to reduce its real estate footprint to align with its broader hybrid work strategy and in an effort to further reduce costs. During the three months ended September 30, 2023, the Company recorded an immaterial reversal of previously recognized restructuring expenses associated with the 2022 Plan. During the nine months ended September 30, 2023, the Company incurred $5.5 million of employee severance costs and related expenses, net of reversals, in connection with the 2022 Plan. As of September 30, 2024, there was no unpaid balance related to the 2022 Plan.
On November 2, 2023, the Company committed to a plan to reduce the Company’s headcount and real estate footprint (the “2023 Plan”) as part of the Company’s expense containment initiatives and other actions to reduce discretionary spending being implemented due to challenging industry dynamics and macroeconomic conditions. The Company did not incur any material expenses related to the 2023 Plan during both the three and nine months ended September 30, 2024 and 2023. As of September 30, 2024 and December 31, 2023, the unpaid balance related to the 2023 Plan was $0.8 million and $8.9 million, respectively.
On April 26, 2024, the Company’s management committed to the wind down of the Company’s Medimat Robotic Dispensing System (“RDS”) product line, subject to local law and statutory works council consultation requirements. During the three and nine months ended September 30, 2024, the Company incurred approximately $0.6 million and $4.1 million, respectively, of employee severance costs and other expenses related to the RDS product line wind down, net of immaterial reversals of previously recognized restructuring expenses, the majority of which were unpaid as of September 30, 2024. In addition, during the nine months ended September 30, 2024, the Company incurred $5.4 million of inventory write-down charges related to the RDS product line wind down that were recorded to cost of revenues in the Company’s Condensed Consolidated Statements of Operations.
Refer to Note 12, Lessee Leases, for information regarding the Company’s restructuring activities for the reduction of its real estate footprint and optimization of certain leased facilities.
The following table summarizes the total employee-related restructuring expense, net of reversals, recognized in the Company’s Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2024 and 2023:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(In thousands)
Cost of product and service revenues
$
642
$
(280)
$
3,338
$
102
Research and development
(15)
(25)
296
467
Selling, general, and administrative
(7)
(276)
149
4,885
Total restructuring expense
$
620
$
(581)
$
3,783
$
5,454
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements are contained throughout this Quarterly Report on Form 10-Q including in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include, but are not limited to, statements about:
•our expectations regarding our future sales pipeline and bookings;
•the extent and timing of future revenues, including the amounts of our current backlog;
•the size or growth of our market or market share;
•our beliefs about drivers of demand for our products, services, and solutions, opportunities in certain market categories, and continued expansion in these market categories, as well asour belief that our technology, services, and solutions within these market categories position us well to address the needs of retail, acute, post-acute, and specialty pharmacy providers;
•continued investment in the industry vision of the Autonomous Pharmacy, our beliefs about the anticipated benefits of such investments, and our expectations regarding continued growth in current and future subscription and cloud-based offerings as we execute on this vision;
•our goal of advancing our platform with the development of new products, services, or solutions or the enhancement of existing products, services, or solutions;
•growth opportunities presented by new products, services, solutions, and markets;
•our projected target revenues, operating costs, and cash flows;
•our ability to align our medication management infrastructure development and global workforce headcount with our current business expectations;
•our goal to deliver on the industry vision of the Autonomous Pharmacy, as well as our plan to migrate our customers from an on-premise infrastructure to our cloud-based platform;
•our belief that our solutions that support the industry vision of the Autonomous Pharmacy are strongly aligned with trends in the healthcare market and are well-positioned to address the evolving needs of healthcare institutions;
•our expectation to continue to acquire companies, businesses, products, services, or technologies and to effectively integrate or manage these acquired companies, businesses, products, services, or technologies;
•our ability to secure adequate supplies of raw materials and components utilized in the manufacture of our products of a quality that we require, on a timely basis, and at acceptable prices;
•our information technology systems or solutions susceptibility to disruptions, breaches, or cyber-attacks; and
•our ability to generate cash from operations, expected future uses of cash, and estimates regarding, and the sufficiency of, our sources of funding and cash resources.
In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goals,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” and variations of these terms and similar expressions.
Forward-looking statements are based on our current expectations and assumptions, and are subject to known and unknown risks and uncertainties, many of which are beyond our control, which may cause our actual results, performance, or achievements to be materially different from those expressed or implied in the forward-looking statements. Such risks and uncertainties include those described throughout this Quarterly Report on Form 10-Q, including Part I - Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II - Item 1A. “Risk Factors,” as well as in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2024. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements should be considered in light of these risks and uncertainties. You should carefully read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits, as well as other documents we file with, or furnish to, the SEC from time to time, with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements in this Quarterly Report on Form 10-Q represent our current estimates and assumptions and speak only as of the date of this Quarterly Report on Form 10-Q. 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 expressed or implied in any forward-looking statements, whether as a result of changed circumstances, future events, even if new information becomes available in the future, or otherwise.
Other Information
All references in this Quarterly Report on Form 10-Q to “Omnicell,” “our,” “us,” “we,” or “the Company” collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries. The term “Omnicell, Inc.” refers only to Omnicell, Inc., excluding its subsidiaries.
We own various registered and unregistered trademarks and service marks used in our business, some of which appear in this Quarterly Report on Form 10-Q, including Omnicell®. This Quarterly Report on Form 10-Q may also include the trademarks and service marks of other companies. Such trademarks and service marks are the marks of their respective owners.
OVERVIEW
Our Business
Omnicell, a leader in transforming the pharmacy care delivery model, is committed to solving the critical challenges inherent in medication management and elevating the role of clinicians within healthcare as an essential component of care delivery. Omnicell is focused on helping its customers to define and deliver a cost effective medication management strategy that is designed to equip and empower pharmacists and nurses to focus on patient care rather than administrative tasks, and to drive improved clinical, operational, and financial outcomes across all care settings. We are doing this with an industry-leading medication management infrastructure which includes robotics, smart devices, intelligent software, and expert services. This comprehensive set of solutions provides the critical foundation for customers to realize the industry vision of the Autonomous Pharmacy, a vision defined by pharmacy leaders for improving operational efficiencies and ultimately targeting zero-error medication management.
Omnicell solutions are helping healthcare facilities worldwide to reduce costs, improve labor efficiency, establish new revenue streams, enhance supply chain control, support compliance, and move closer to the industry vision of the Autonomous Pharmacy. We sell our product and consumable solutions together with related service offerings. Revenues generated in the United States represented 91% of our total revenues for both the three months ended September 30, 2024 and 2023, and 91% and 88% of our total revenues for the nine months ended September 30, 2024 and 2023, respectively.
Over the past several years, our business has expanded from a single-point solution to a platform of products and services that will help to further advance the industry vision of the Autonomous Pharmacy. This expansion has resulted in larger deal sizes across multiple products, services, and implementations for customers and, we believe, more comprehensive,
valuable, and enduring relationships. As our business evolves, we continue to evaluate the metrics and methods we use to measure the success of our business.
We utilize bookings as an indicator of the success of our business. We define bookings generally as: (i) the value ofnon-cancelable contracts for our connected devices, software products, and Advanced Services (although, for those Advanced Services contracts without a minimum commitment, bookings only include the amount of revenue that has been recognized once the services have been provided); and (ii) for our consumables, the value of orders placed through our Omnicell Storefront online platform or through written or telephonic orders. We typically exclude technical services and other less significant items ancillary to our products and services, such as freight revenue, from bookings. In addition, dependent upon counterparty or credit risk, which is evaluated at the time of contract signing, for a given multi-year subscription contract we may reduce the portion of the contractual commitment booked at a given time. As noted, the portfolio of products, solutions and services we offer has evolved. As a result, the ordering process for certain of our solutions has also evolved. For example, orders for certain solutions may not include a purchase order. Connected devices and software license bookings are recorded as revenue upon customer acceptance of the installation or receipt of goods. Revenues from Advanced Services bookings are recorded over the contractual term.
We generally provide installation planning and consulting as part of most connected device product sales, which are typically included in the initial price of the solution. To help ensure the maximum availability of our systems, our customers typically purchase technical services contracts (maintenance and support) in increments of one to five years. In addition to connected device product sales, we provide a range of services to our customers. We also provide Advanced Services such as Central Pharmacy Dispensing Service (service portion), IV Compounding Service (service portion), EnlivenHealth, Specialty Pharmacy Services, 340B solutions, Inventory Optimization Service, and other software solutions, which typically are provided over two to seven years.
The following table summarizes each revenue category:
Revenue Category
Revenue Type
Income Statement Classification
Included in Bookings
Connected devices, software licenses, and other
Nonrecurring
Product
Yes (1)
Consumables
Recurring
Product
Yes
Technical services
Recurring
Service
No
Advanced Services (2) (3)
Recurring
Service
Yes
_________________________________________________
(1) Certain other insignificant revenue streams ancillary to our products and services, such as freight revenue, are not included in bookings.
(2) Includes Central Pharmacy Dispensing Service (service portion), IV Compounding Service (service portion), EnlivenHealth, Specialty Pharmacy Services, 340B solutions, Inventory Optimization Service, and other software solutions.
(3) For those Advanced Services contracts without a minimum commitment, bookings only include the amount of revenue that has been recognized once the services have been provided.
Our full-time employee headcount was approximately 3,660 and 3,650 on September 30, 2024 and December 31, 2023, respectively.
Operating Segments
We manage our operations as a single segment for the purposes of assessing performance and making operating decisions. Our Chief Operating Decision Maker (“CODM”) is our Chief Executive Officer. The CODM allocates resources and evaluates the performance of Omnicell at the consolidated level using information about our revenues, gross profit, income from operations, and other key financial data. All significant operating decisions are based upon an analysis of Omnicell as one operating segment, which is the same as our reporting segment.
Business Strategy
The U.S. spent a total of $634 billion on prescription drugs in 2022, an increase of 9% compared to 2021, and prescription drugs impact the vast majority of patients in virtually all settings of care. We believe there are significant challenges facing the practice of pharmacy today including, but not limited to, budget constraints, increased healthcare worker turnover rates, labor shortages, drug shortages, drug diversion, manual and error-prone processes, complex compliance requirements, and limited inventory visibility. Each of these challenges may lead to poor medication management outcomes including, but not limited to, medication errors, adverse drug events, lack of patient adherence, and medication waste. We also recognize that these challenges may impact the timing of contracting for, or implementing, our products, solutions, or services. However, we believe that over time these significant challenges to the practice of pharmacy will drive demand for increased
automation, visibility, insights, and improved medication management outcomes that our solutions are designed to enable. Because of this, we believe that our solutions are well-positioned to address the evolving needs of healthcare institutions and therefore present opportunities for long-term growth.
In an effort to address these challenges and deliver solutions to help drive positive medication management outcomes, we continue to make significant investments in our research and development efforts to further advance the industry vision of the Autonomous Pharmacy. Furthermore, we believe a combination of robotics, smart devices, intelligent software, and expert services is needed in every care setting where medications are managed. We are focused on delivering solutions to help our customers realize the industry vision of the Autonomous Pharmacy and drive positive medication management outcomes with outstanding customer experience through a mature channel in four market categories:
•Point of Care. As a market leader,we expect to continue expansion into this product market as customers increase the use of our dispensing systems in more areas within their hospitals and increasingly in ambulatory care settings. While the macroeconomic environment is showing some signs of improvement, we recognize that some health system customers may still be facing budgetary or labor constraints, which may impact our customers’ considerations in the near term when they are determining whether to implement new solutions and workflows. As we are largely through the replacement cycle of our previous generation of automated dispensing systems, we are seeing demand moderate. With the launch of next-generation enhancements and solutions for points of care, we believe we are providing a path for customers to maximize the value of their existing technology investments through upgrades and acquisitions of new program offerings for their current installed base. We also believe there is an opportunity for us to expand this offering and define a new standard for dispensing systems in ambulatory settings. We believe our current solutions within the Point of Care market and new innovation and services will continue to help customers drive improved clinical and financial outcomes.
•Central Pharmacy and IV Compounding. This market represents thebeginning of the medication management process in acute care settings, and we believe it is a significant automation opportunity for high volumes of manual, repetitive, and error-prone processes that are often common in pharmacies today. Manual medication dispensing processes are usually labor intensive, error-prone, and may lead to excess medication waste and expirations for our healthcare partners. Automating the central pharmacy dispensing process should enable customers to reallocate pharmacy labor, enhance dispensing accuracy and patient safety, and reduce medication waste and expirations. Likewise, the manual compounding of sterile IV preparations can be error-prone and create significant patient safety risks, and outsourcing sterile IV compounding could lead to increased medication costs and lack of access to needed medications as a result of being unable to source medications when they are required. As a result, we believe IV automation provides a significant opportunity to enhance patient safety and reduce costs.We anticipate that these technology-enabled services will become more critical as health systems continue to face labor shortages, increased financial pressure, and supply chain disruptions. As health systems expand and grow, we find that traditional methods of medication management may lead to multi-vendor environments that may complicate workflows, often creating unnecessary redundancy and increasing chances for potential errors. We believe health systems need a single source for technology and resources that is designed to execute and optimize centralized medication management strategies to better meet current and future health system needs.
•Specialty Pharmacy and 340B Program. We believe that health systems will continue to invest in programs that are intended to improve patient outcomes and drive cost savings by utilizing specialty pharmacies and the federal 340B Drug Pricing Program (the “340B Program”). The 340B Program allows qualifying hospitals and health systems to stretch federal resources and expand patient access to healthcare by requiring manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to eligible healthcare organizations and covered entities. Specialty drugs are used for treatment of complex conditions and often require intensive patient management and specialized workflows for dispensing and care coordination. Specialty medications are projected to account for nearly 60% of U.S. total spending on medications, with total spending projected to be approximately $420 billion in 2025. Specialty pharmacies serve as the connection between patients, prescribing physicians, and payers and work to streamline access and adherence to these specialty drugs. We believe a solution that is designed to help health systems start or optimize their specialty pharmacy programs and the related pharmaceutical aspects of patient care will help ensure continuity of care and should contribute to the revenue and profitability of those organizations. We believe that a fully optimized specialty pharmacy operation represents one of the largest economic opportunities for hospitals and health systems.
•Retail, Institutional, and Payer. We believe the Retail, Institutional, and Payer market represents a significant opportunity as healthcare evolves. Retail drug prescriptions represent 85% of all prescription drugs dispensed in the U.S., growing at a rate of 2.7% annually through 2024. Additionally, the COVID-19 pandemic accelerated the shift of outpatient care from hospitals and physician offices to other, more convenient settings, such as retail pharmacies and the home (including through telehealth technologies). New technologies and increased scope of practice for pharmacists appear to be spurring innovation and expansion of the provision of clinical services by retail pharmacies, which, combined with the move to value-based care, we believe will drive the adoption of our patient engagement solutions, that are intended to help providers (including pharmacists) and payers engage patients in new ways that are expected to improve outcomes, reduce the total cost of care, and lead to more profitable operations. Because of the complexity of relationships between payers and providers, as well as the large number of retail pharmacies, including a significant number of independent pharmacies, we believe a network of established relationships between payers, providers and pharmacies will continue to be important.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“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 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 the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements:
•Revenue recognition;
•Lessor leases;
•Allowance for credit losses;
•Inventory;
•Internal-use and external-use software development costs;
•Lessee leases;
•Business combinations;
•Valuation and impairment of goodwill and intangible assets;
•Share-based compensation; and
•Accounting for income taxes.
There were no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the nine months ended September 30, 2024 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2023.
Recently Issued Authoritative Guidance
Refer to “Recently Issued Authoritative Guidance” in Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position, and cash flows.
Product revenues represented 56% and 63% of total revenues for the three months ended September 30, 2024 and 2023, respectively. Product revenues decreased by $30.4 million, primarily due to lower volumes from our automated dispensing systems business primarily as a result of the impact of a continued challenging environment for some of our health system customers and the timing of our XT Series systems lifecycle, as we are largely through the replacement cycle.
Service revenues represented 44% and 37% of total revenues for the three months ended September 30, 2024 and 2023, respectively. Service revenues include revenues from technical services and Advanced Services offerings. Service revenues increased by $14.2 million, primarily due to an increase of $2.3 million in technical services revenues as a result of growth in our installed customer base and the impact of pricing actions, as well as an increase of $11.9 million in Advanced Services revenues due to continued customer demand.
Our international sales represented 9% of total revenues for both the three months ended September 30, 2024 and 2023 and are expected to be affected by foreign currency exchange rate fluctuations. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency exchange rates.
Nine Months Ended September 30,
Change in
2024
2023
$
%
(Dollars in thousands)
Product revenues
$
448,236
$
562,906
$
(114,670)
(20)%
Percentage of total revenues
56%
63%
Service revenues
357,123
325,359
31,764
10%
Percentage of total revenues
44%
37%
Total revenues
$
805,359
$
888,265
$
(82,906)
(9)%
Product revenues represented 56% and 63% of total revenues for the nine months ended September 30, 2024 and 2023, respectively. Product revenues decreased by $114.7 million, due to lower volumes from our automated dispensing systems business primarily as a result of the impact of a continued challenging environment for some of our health system customers and the timing of our XT Series systems lifecycle, as we are largely through the replacement cycle.
Service revenues represented 44% and 37% of total revenues for the nine months ended September 30, 2024 and 2023, respectively. Service revenues include revenues from technical services and Advanced Services offerings. Service revenues increased by $31.8 million, primarily due to an increase of $9.6 million in technical services revenues as a result of growth in our installed customer base and the impact of pricing actions, as well as an increase of $22.2 million in Advanced Services revenues due to continued customer demand.
Our international sales represented 9% and 12% of total revenues for the nine months ended September 30, 2024 and 2023, respectively, and are expected to be affected by foreign currency exchange rate fluctuations. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency exchange rates.
Our ability to continue to grow revenues is dependent on our ability to continue to obtain orders from customers, which may be dependent upon customers’ capital equipment budgets and/or capital equipment approval cycles, our ability to produce quality products and consumables to fulfill customer demand, the volume of installations we are able to complete, our ability to meet customer needs by providing a quality installation experience, our ability to develop new or enhance existing
solutions, and our flexibility in workforce 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 and/or staffing levels allow for installations.
Cost of Revenues and Gross Profit
Cost of revenues is primarily comprised of three general categories: (i) standard product costs which account for the majority of the product cost of revenues that are provided to customers, and are inclusive of purchased material, labor to build the product, and overhead costs associated with production; (ii) costs of providing services and installation costs, including costs of personnel and other expenses; and (iii) other costs, including variances in standard costs and overhead, scrap costs, rework, provisions for excess and obsolete inventory, and amortization of software development costs and intangibles.
Three Months Ended September 30,
Change in
2024
2023
$
%
(Dollars in thousands)
Cost of revenues:
Cost of product revenues
$
94,448
$
106,311
$
(11,863)
(11)%
As a percentage of related revenues
60%
56%
Cost of service revenues
65,704
60,388
$
5,316
9%
As a percentage of related revenues
53%
55%
Total cost of revenues
$
160,152
$
166,699
$
(6,547)
(4)%
As a percentage of total revenues
57%
56%
Gross profit
$
122,268
$
131,964
$
(9,696)
(7)%
Gross margin
43%
44%
Cost of revenues for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 decreased by $6.5 million, primarily driven by a $11.9 million decrease in cost of product revenues, partially offset by a $5.3 million increase in cost of service revenues.
The decrease in cost of product revenues was primarily driven by the decrease in product revenues of $30.4 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues for the three months ended September 30, 2024, primarily due to the decrease in revenues of higher margin products as well as the impact of certain fixed costs, such as labor and overhead. In addition, the decrease in cost of product revenues was partially offset by an increase of $0.9 million of restructuring costs for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The increase in cost of service revenues was primarily driven by the increase in service revenues of $14.2 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023.
The overall decrease in gross margin primarily relates to lower product revenues for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, whereas the decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues, primarily due to the decrease in revenues of higher margin products as well as the impact of certain fixed costs, such as labor and overhead. The decrease in cost of product revenues is partially offset by restructuring costs incurred during the three months ended September 30, 2024. Our gross profit for the three months ended September 30, 2024 was $122.3 million, as compared to $132.0 million for the three months ended September 30, 2023.
Cost of revenues for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023 decreased by $20.7 million, primarily driven by a $37.5 million decrease in cost of product revenues, partially offset by a $16.8 million increase in cost of service revenues.
The decrease in cost of product revenues was primarily driven by the decrease in product revenues of $114.7 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues for the nine months ended September 30, 2024, primarily due to the decrease in revenues of higher margin products as well as the impact of certain fixed costs, such as labor and overhead. In addition, the decrease in cost of product revenues was partially offset by $5.4 million of inventory write-down charges related to the RDS product line wind down incurred during the nine months ended September 30, 2024 and an increase of $2.9 million of restructuring costs for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The increase in cost of service revenues was primarily driven by the increase in service revenues of $31.8 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023.
The overall decrease in gross margin primarily relates to lower product revenues for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, whereas the decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues, primarily due to the decrease in revenues of higher margin products as well as the impact of certain fixed costs, such as labor and overhead. The decrease in cost of product revenues is partially offset by inventory write-down charges related to the RDS product line wind down and restructuring costs incurred during the nine months ended September 30, 2024. Our gross profit for the nine months ended September 30, 2024 was $329.2 million, as compared to $391.4 million for the nine months ended September 30, 2023.
Operating Expenses and Interest and Other Income (Expense), Net
Research and Development. Research and development expenses decreased by $3.1 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease was primarily attributed to a decrease in employee-related expenses as a result of lower headcount.
Selling, General, and Administrative. Selling, general, and administrative expenses decreased by $9.5 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023. The decrease was primarily due to a decrease of $6.6 million in employee-related expenses as a result of lower headcount and a decrease of $1.1 million in freight out for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, as well as $1.3 million of executives transition costs incurred during the three months ended September 30, 2023.
Interest and Other Income (Expense), Net. Interest and other income (expense), net changed by $1.4 million for the three months ended September 30, 2024 compared to the three months ended September 30, 2023, primarily driven by a $1.5 million increase in other income and a $0.1 million increase in other expense. The increase in other income during the three months ended September 30, 2024 as compared to the three months ended September 30, 2023 is primarily attributable to higher interest income received due to higher cash and cash equivalents balances.
Nine Months Ended September 30,
Change in
2024
2023
$
%
(Dollars in thousands)
Operating expenses:
Research and development
$
64,372
$
70,296
$
(5,924)
(8)%
As a percentage of total revenues
8%
8%
Selling, general, and administrative
276,929
332,643
$
(55,714)
(17)%
As a percentage of total revenues
34%
37%
Total operating expenses
$
341,301
$
402,939
$
(61,638)
(15)%
As a percentage of total revenues
42%
45%
Interest and other income (expense), net
$
14,052
$
9,912
$
4,140
42%
Research and Development. Research and development expenses decreased by $5.9 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease was primarily attributed to a decrease of $11.8 million in employee-related expenses as a result of lower headcount, partially offset by an increase of $2.1 million due to the timing of capitalized software projects, an increase of $1.6 million in cloud hosting services expenses, and an increase of $1.3 million in consulting expenses.
Selling, General, and Administrative. Selling, general, and administrative expenses decreased by $55.7 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. The decrease was primarily due to a decrease of $28.9 million in employee-related expenses as a result of lower headcount, a decrease of $8.4 million in impairment and abandonment charges of operating lease right-of-use and other assets in connection with restructuring activities of certain leased facilities, a decrease of $4.7 million in restructuring costs, a decrease of $3.3 million in commissions expenses, a decrease of $2.6 million in freight out, and a decrease of $2.2 million in executives transition costs.
Interest and Other Income (Expense), Net. Interest and other income (expense), net changed by $4.1 million for the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023, primarily driven by a $5.1 million increase in other income and a $1.0 million increase in other expense. The increase in other income during the nine months ended September 30, 2024 as compared to the nine months ended September 30, 2023 is primarily attributable to higher interest income received due to higher interest rates and higher cash and cash equivalents balances.
For the nine months ended September 30, 2024 and 2023, we recorded a provision for income taxes of $5.3 million and $4.4 million, respectively, by applying our estimated annual effective tax rate to our year-to-date measure of ordinary income and adjusted for $4.9 million and $5.6 million, respectively, of discrete income tax expense primarily from equity compensation. The change in the provision for income taxes for the nine months ended September 30, 2024 compared to the provision for income taxes for the same period in 2023 was insignificant, consisting of various offsetting components of annual effective tax rate and discrete income tax expense.
Refer to Note 14, Income Taxes, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $570.6 million at September 30, 2024 compared to $468.0 million at December 31, 2023. All of our cash and cash equivalents are invested in bank accounts and money market funds held in sweep and asset management accounts with financial institutions of high credit quality.
Our cash position and working capital at September 30, 2024 and December 31, 2023 were as follows:
September 30, 2024
December 31, 2023
(In thousands)
Cash and cash equivalents
$
570,628
$
467,972
Working capital (1)
$
49,745
$
559,779
_________________________________________________
(1) The decrease in working capital as of September 30, 2024 was primarily due to the classification of our convertible senior notes as a current rather than long-term liability. Refer to Note 10, Convertible Senior Notes, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
Our ratio of current assets to current liabilities was 1.1:1 and 2.5:1 at September 30, 2024 and December 31, 2023, respectively.
Sources of Cash
Revolving Credit Facility
On November 15, 2019, Omnicell, Inc. entered into an Amended and Restated Credit Agreement (as amended, the “Prior A&R Credit Agreement”) with the lenders from time to time party thereto, Wells Fargo Securities, LLC, Citizens Bank, N.A., and JPMorgan Chase Bank, N.A., as joint lead arrangers, and Wells Fargo Bank, National Association, as administrative agent. The Prior A&R Credit Agreement provided for (a) a five-year revolving credit facility of $500.0 million (the “Prior Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to $250.0 million (the “Prior Incremental Facility”). In addition, the Prior A&R Credit Agreement included a letter of credit sub-limit of up to $15.0 million and a swing line loan sub-limit of up to $25.0 million. The Prior A&R Credit Agreement was subsequently amended on September 22, 2020 and March 29, 2023 to permit the issuance of the convertible senior notes and the purchase of the convertible note hedge transactions (as described in Note 10, Convertible Senior Notes, of the Notes to Condensed Consolidated Financial Statements
included in this Quarterly Report on Form 10-Q), expand our flexibility to make restricted payments (including common stock repurchases), and replace the total net leverage covenant, as well as to remove and replace the interest rate benchmark based on the London interbank offered rate (“LIBOR”) and related LIBOR-based mechanics with an interest rate benchmark based on the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York and related SOFR-based mechanics.
On October 10, 2023, Omnicell, Inc. entered into a Second Amended and Restated Credit Agreement (the “Second A&R Credit Agreement”) with the lenders from time to time party thereto, Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., PNC Capital Markets LLC and TD Securities (USA) LLC as joint lead arrangers and Wells Fargo Bank, National Association, as administrative agent. The Second A&R Credit Agreement supersedes the Prior A&R Credit Agreement and provides for (a) a five-year revolving credit facility of $350.0 million (the “Current Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to an amount equal to the sum of (i) the greater of $250.0 million and 100% of the adjusted consolidated EBITDA for the last four quarters and (ii) additional amounts subject to pro forma compliance with certain consolidated secured net leverage ratio (the “Current Incremental Facility”). In addition, the Second A&R Credit Agreement includes a letter of credit sub-limit of up to $15.0 million and a swing line loan sub-limit of up to $25.0 million. The Second A&R Credit Agreement has an expiration date of October 10, 2028, subject to acceleration under certain conditions, upon which date all remaining outstanding borrowings will be due and payable.
As of September 30, 2024, we had $350.0 million of funds available under the Current Revolving Credit Facility. As of September 30, 2024, there was no outstanding balance under the Current Revolving Credit Facility and we were in full compliance with all covenants. Refer to Note 9, Debt and Credit Agreement, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information. We expect to use future loans under the Current Revolving Credit Facility, if any, for working capital, potential acquisitions, and other general corporate purposes.
Uses of Cash
Our future uses of cash are expected to be primarily for working capital, capital expenditures, and other contractual obligations. We also expect a continued use of cash for potential acquisitions and acquisition-related activities, as well as repurchases of our common stock. In addition, we may also use a portion of our cash as we consider various options related to our outstanding debt.
The 2016 Repurchase Program has a total of $2.7 million remaining for future repurchases as of September 30, 2024, which may result in additional use of cash. There were no stock repurchases during the nine months ended September 30, 2024. Refer to “Stock Repurchase Programs” under Note 15, Employee Benefits and Share-Based Compensation, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
Based on our current business plan and backlog, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations, cash generated from the exercise of employee stock options and purchases under our Employee Stock Purchase Plan (“ESPP”), along with the availability of funds under the Current Revolving Credit Facility will be sufficient to meet our cash needs for working capital, capital expenditures, potential acquisitions, outstanding debt, and other contractual obligations for at least the next twelve months. For periods beyond the next twelve months, we also anticipate that our net operating cash flows plus existing balances of cash and cash equivalents will suffice to fund the growth of our business.
Cash Flows
The following table summarizes, for the periods indicated, selected items in our Condensed Consolidated Statements of Cash Flows:
Nine Months Ended September 30,
2024
2023
(In thousands)
Net cash provided by (used in):
Operating activities
$
131,407
$
142,680
Investing activities
(39,225)
(42,644)
Financing activities
(1,148)
10,290
Effect of exchange rate changes on cash and cash equivalents
879
(464)
Net increase in cash, cash equivalents, and restricted cash
We expect cash from our operating activities to fluctuate in future periods as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing of other liability payments.
Net cash provided by operating activities was $131.4 million for the nine months ended September 30, 2024, primarily consisting of operating inflows of $93.8 million and favorable working capital movements of $37.6 million. Operating inflows consisted of a net loss of $3.3 million, adjusted for non-cash items of $97.1 million, which consisted primarily of depreciation and amortization expense of $62.3 million, share-based compensation expense of $30.3 million, inventory write-down charges of $5.4 million, amortization of operating lease right-of-use assets of $5.3 million, and a change in deferred income taxes of $9.4 million. The favorable working capital was primarily due to an increase in deferred revenues of $27.7 million driven by an increase in billings, a decrease in inventories of $10.0 million resulting from inventory management initiatives, a decrease of $8.4 million in other current assets due to a decrease in income tax receivables, and an increase of $7.0 million in accrued liabilities due to an increase in rebate liabilities. These cash inflows were partially offset by a decrease of $8.0 million in operating lease liabilities, an increase of $7.5 million in investment in sales-type leases resulting from growth in our Advanced Services offerings, and a decrease in accrued compensation of $6.7 million.
Net cash provided by operating activities was $142.7 million for the nine months ended September 30, 2023, primarily consisting of operating inflows of $107.8 million and favorable working capital movements of $34.9 million. Operating inflows consisted of a net loss of $6.0 million, adjusted for non-cash items of $113.8 million, which consisted primarily of depreciation and amortization expense of $65.6 million, share-based compensation expense of $43.1 million, impairment and abandonment of operating lease right-of-use assets related to facilities of $7.8 million, amortization of operating lease right-of-use assets of $6.2 million, and a change in deferred income taxes of $14.2 million. The favorable working capital was primarily due to a decrease in inventories of $31.7 million primarily due to management of inventory levels to align with the current forecasted demand, a decrease in accounts receivable and unbilled receivables of $27.1 million primarily due to the timing of billings, shipments, and collections, as well as the impacts of lower revenues, an increase in deferred revenues of $23.6 million primarily due to an increase in billings for certain service and subscription offerings, and a decrease in prepaid commissions of $5.5 million. These cash inflows were partially offset by a decrease in accrued compensation of $29.4 million primarily due to a decrease in the accrual for restructuring initiatives, lower commissions, as well as timing of payroll and ESPP purchases, a decrease in accounts payable of $13.4 million primarily due to an overall decrease in spending, as well as the timing of payments, an increase in investment in sales-type leases of $8.8 million primarily due to the acceptance of certain Advanced Services products under sales-type lease arrangements, and a decrease in operating lease liabilities of $8.1 million.
Investing Activities
Net cash used in investing activities was $39.2 million for the nine months ended September 30, 2024, which consisted of capital expenditures of $27.4 million for property and equipment and $11.8 million for external-use software development costs.
Net cash used in investing activities was $42.6 million for the nine months ended September 30, 2023, which consisted of capital expenditures of $32.4 million for property and equipment, and $10.2 million for external-use software development costs.
Financing Activities
Net cash used in financing activities was $1.1 million for the nine months ended September 30, 2024, primarily due to a net change in the customer funds balances of $10.7 million, partially offset by $13.1 million in proceeds from employee stock option exercises and ESPP purchases.
Net cash provided by financing activities was $10.3 million for the nine months ended September 30, 2023, primarily due to $23.0 million in proceeds from employee stock option exercises and ESPP purchases, partially offset by $6.1 million in employees’ taxes paid related to restricted stock unit vesting and a net change in the customer funds balances of $6.6 million.
Contractual Obligations
There have been no significant changes during the nine months ended September 30, 2024 to the contractual obligations disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2023.
Contractual obligations as of September 30, 2024 were as follows:
Payments Due By Period
Total
Remainder of 2024
2025 - 2026
2027 - 2028
2029 and thereafter
(In thousands)
Operating leases (1)
$
47,310
$
3,296
$
23,993
$
17,750
$
2,271
Purchase obligations (2)
$
111,167
71,423
39,666
78
—
Convertible senior notes (3)
$
576,438
—
576,438
—
—
Total (4)
$
734,915
$
74,719
$
640,097
$
17,828
$
2,271
_________________________________________________
(1)Commitments under operating leases relate primarily to leased office buildings, data centers, office equipment, and vehicles. Refer to Note 12, Lessee Leases, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
(2)We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. These amounts are associated with agreements that are enforceable and legally binding. The amounts under such contracts are included in the table above because we believe that cancellation of these contracts is unlikely and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials.
(3)We issued convertible senior notes in September 2020 that are due in September 2025. The obligations presented above include both principal and interest for these notes. Although these notes mature in 2025, they may be converted into cash and shares of our common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayment of the principal amounts sooner than the scheduled repayment as indicated in the table above. Refer to Note 10, Convertible Senior Notes, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
(4)Refer to Note 13, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Risk
We operate in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which are the British Pound and the Euro. In order to manage foreign currency risk, at times we enter into foreign exchange forward contracts to mitigate risks associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities of our foreign subsidiaries. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We do not enter into derivative contracts for trading purposes. As of September 30, 2024, we did not have any outstanding foreign exchange forward contracts.
Interest Rate Fluctuation Risk
We are exposed to interest rate risk through our borrowing activities. As of September 30, 2024, there was no outstanding balance under the current Second A&R Credit Agreement. Refer to Note 9, Debt and Credit Agreement, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
The net carrying amount under our convertible senior notes was $572.0 million as of September 30, 2024. Although our convertible senior notes are based on a fixed rate, changes in interest rates could impact the fair value of such notes. As of September 30, 2024, the fair market value of our convertible senior notes was $548.8 million. Refer to Note 4, Cash and Cash Equivalents and Fair Value of Financial Instruments, and Note 10, Convertible Senior Notes, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
We have used, and in the future we may use, interest rate swap agreements to protect against adverse fluctuations in interest rates by reducing our exposure to variability in cash flows relating to interest payments on a portion of our outstanding debt. We do not hold or issue any derivative financial instruments for speculative trading purposes. As of September 30, 2024, we did not have any outstanding interest rate swap agreements.
There were no significant changes in our market risk exposures during the nine months ended September 30, 2024 as compared to the market risk exposures disclosed in “Quantitative and Qualitative Disclosures About Market Risk,” set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 28, 2024.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.
Limitations on Effectiveness of Controls
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the internal control system are met.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2024.
The information set forth under “Legal Proceedings” in Note 13, Commitments and Contingencies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
There are no material changes to the risk factors previously disclosed in Part I - Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, which was filed with the SEC on February 28, 2024.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During the three months ended September 30, 2024, we did not repurchase any shares of our common stock under our repurchase program authorized on August 2, 2016, which does not expire, and provides for the repurchase of up to $50.0 million of the Company’s common stock (the “2016 Repurchase Program”). As of September 30, 2024, the maximum dollar value of shares that may yet be purchased under the 2016 Repurchase Program was $2.7 million. Refer to “Stock Repurchase Programs” under Note 15, Employee Benefits and Share-Based Compensation, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Securities Trading Plans of Directors and Officers
During the three months ended September 30, 2024, none of our directors or officers adopted or terminated a “Rule 10b5-1 trading arrangement” or adopted or terminated a “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).
Inline XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
OMNICELL, INC.
Date:
November 8, 2024
By:
/s/ Nchacha E. Etta
Nchacha E. Etta
Executive Vice President & Chief Financial Officer
(principal financial officer and duly authorized officer)