OMNICELL, INC. - Quarter Report: 2022 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________________________________________________
FORM 10-Q
| (Mark One) | |||||
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended September 30, 2022
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
| For the transition period from to | |||||
Commission File No. 000-33043
OMNICELL, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 94-3166458 | ||||
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
2625 Augustine Drive, Suite 301
Santa Clara, CA 95054
(Address of registrant’s principal executive offices, including zip code)
(650) 251-6100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||||||||
| Common Stock, $0.001 par value | OMCL | NASDAQ Global Select Market | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ | ||||||||||||||||||||
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitions period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ☐ | ||||||||||||||||||||||||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of October 28, 2022, there were 44,649,842 shares of the registrant’s common stock, $0.001 par value, outstanding.
OMNICELL, INC.
TABLE OF CONTENTS
| Page | ||||||||
2
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands, except par value) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 266,402 | $ | 349,051 | |||||||
Accounts receivable and unbilled receivables, net of allowances of $5,012 and $5,272, respectively | 354,098 | 240,894 | |||||||||
| Inventories | 147,096 | 119,924 | |||||||||
| Prepaid expenses | 24,862 | 22,499 | |||||||||
| Other current assets | 56,674 | 48,334 | |||||||||
| Total current assets | 849,132 | 780,702 | |||||||||
| Property and equipment, net | 88,356 | 71,141 | |||||||||
| Long-term investment in sales-type leases, net | 33,807 | 18,391 | |||||||||
| Operating lease right-of-use assets | 44,133 | 48,549 | |||||||||
| Goodwill | 731,294 | 738,900 | |||||||||
| Intangible assets, net | 251,004 | 277,616 | |||||||||
| Long-term deferred tax assets | 16,619 | 15,883 | |||||||||
| Prepaid commissions | 54,994 | 63,795 | |||||||||
| Other long-term assets | 110,346 | 127,519 | |||||||||
| Total assets | $ | 2,179,685 | $ | 2,142,496 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 73,517 | $ | 71,513 | |||||||
| Accrued compensation | 42,799 | 71,130 | |||||||||
| Accrued liabilities | 146,440 | 133,167 | |||||||||
| Deferred revenues, net | 113,925 | 112,196 | |||||||||
| Convertible senior notes, net | — | 488,152 | |||||||||
| Total current liabilities | 376,681 | 876,158 | |||||||||
| Long-term deferred revenues | 34,519 | 20,194 | |||||||||
| Long-term deferred tax liabilities | 16,140 | 51,705 | |||||||||
| Long-term operating lease liabilities | 41,862 | 39,911 | |||||||||
| Other long-term liabilities | 9,285 | 7,839 | |||||||||
| Convertible senior notes, net | 565,803 | — | |||||||||
| Total liabilities | 1,044,290 | 995,807 | |||||||||
| Commitments and contingencies (Note 13) | |||||||||||
| Stockholders’ equity: | |||||||||||
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued | — | — | |||||||||
Common stock, $0.001 par value, 100,000 shares authorized; 54,929 and 54,073 shares issued; 44,646 and 44,179 shares outstanding, respectively | 55 | 54 | |||||||||
Treasury stock at cost, 10,283 and 9,894 shares outstanding, respectively | (290,319) | (238,109) | |||||||||
| Additional paid-in capital | 1,030,665 | 1,024,580 | |||||||||
| Retained earnings | 419,136 | 368,571 | |||||||||
| Accumulated other comprehensive loss | (24,142) | (8,407) | |||||||||
| Total stockholders’ equity | 1,135,395 | 1,146,689 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,179,685 | $ | 2,142,496 | |||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
3
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Product revenues | $ | 246,565 | $ | 213,970 | $ | 706,246 | $ | 589,006 | |||||||||||||||
| Services and other revenues | 101,494 | 82,432 | 292,027 | 231,978 | |||||||||||||||||||
| Total revenues | 348,059 | 296,402 | 998,273 | 820,984 | |||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Cost of product revenues | 134,023 | 110,743 | 374,175 | 303,597 | |||||||||||||||||||
| Cost of services and other revenues | 54,941 | 38,880 | 156,864 | 112,027 | |||||||||||||||||||
| Total cost of revenues | 188,964 | 149,623 | 531,039 | 415,624 | |||||||||||||||||||
| Gross profit | 159,095 | 146,779 | 467,234 | 405,360 | |||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | 25,171 | 19,477 | 76,556 | 53,770 | |||||||||||||||||||
| Selling, general, and administrative | 115,459 | 97,910 | 354,644 | 273,672 | |||||||||||||||||||
| Total operating expenses | 140,630 | 117,387 | 431,200 | 327,442 | |||||||||||||||||||
| Income from operations | 18,465 | 29,392 | 36,034 | 77,918 | |||||||||||||||||||
| Interest and other income (expense), net | (1,148) | (6,065) | (2,973) | (18,715) | |||||||||||||||||||
| Income before provision for income taxes | 17,317 | 23,327 | 33,061 | 59,203 | |||||||||||||||||||
| Provision for (benefit from) income taxes | 543 | (5,990) | (995) | (4,665) | |||||||||||||||||||
| Net income | $ | 16,774 | $ | 29,317 | $ | 34,056 | $ | 63,868 | |||||||||||||||
| Net income per share: | |||||||||||||||||||||||
| Basic | $ | 0.38 | $ | 0.67 | $ | 0.77 | $ | 1.48 | |||||||||||||||
| Diluted | $ | 0.37 | $ | 0.61 | $ | 0.73 | $ | 1.35 | |||||||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||||||||
| Basic | 44,441 | 43,648 | 44,304 | 43,293 | |||||||||||||||||||
| Diluted | 45,819 | 48,341 | 46,759 | 47,195 | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
4
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Net income | $ | 16,774 | $ | 29,317 | $ | 34,056 | $ | 63,868 | |||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Foreign currency translation adjustments | (6,770) | (2,299) | (15,735) | (2,268) | |||||||||||||||||||
| Other comprehensive loss | (6,770) | (2,299) | (15,735) | (2,268) | |||||||||||||||||||
| Comprehensive income | $ | 10,004 | $ | 27,018 | $ | 18,321 | $ | 61,600 | |||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
5
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
| Common Stock | Treasury Stock | Additional Paid-In Capital | Accumulated Earnings | Accumulated Other Comprehensive Income (Loss) | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2021 | 54,073 | $ | 54 | (9,894) | $ | (238,109) | $ | 1,024,580 | $ | 368,571 | $ | (8,407) | $ | 1,146,689 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 8,213 | — | 8,213 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (2,555) | (2,555) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 16,208 | — | — | 16,208 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 384 | — | — | — | 18,951 | — | — | 18,951 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (4,322) | — | — | (4,322) | |||||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | (389) | (52,210) | — | — | — | (52,210) | |||||||||||||||||||||||||||||||||||||||
| — | — | — | — | (72,742) | 16,509 | — | (56,233) | ||||||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2022 | 54,457 | 54 | (10,283) | (290,319) | 982,675 | 393,293 | (10,962) | 1,074,741 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 9,069 | — | 9,069 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (6,410) | (6,410) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 17,213 | — | — | 17,213 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 114 | 1 | — | — | 2,171 | — | — | 2,172 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (4,148) | — | — | (4,148) | |||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2022 | 54,571 | 55 | (10,283) | (290,319) | 997,911 | 402,362 | (17,372) | 1,092,637 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 16,774 | — | 16,774 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (6,770) | (6,770) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 17,310 | — | — | 17,310 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 358 | — | — | — | 18,416 | — | — | 18,416 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (2,972) | — | — | (2,972) | |||||||||||||||||||||||||||||||||||||||
| Balances as of September 30, 2022 | 54,929 | $ | 55 | (10,283) | $ | (290,319) | $ | 1,030,665 | $ | 419,136 | $ | (24,142) | $ | 1,135,395 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
6
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) - CONTINUED
| Common Stock | Treasury Stock | Additional Paid-In Capital | Accumulated Earnings | Accumulated Other Comprehensive Income (Loss) | Stockholders’ Equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2020 | 52,677 | $ | 53 | (9,894) | $ | (238,109) | $ | 920,359 | $ | 290,722 | $ | (5,522) | $ | 967,503 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 14,127 | — | 14,127 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (621) | (621) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 11,772 | — | — | 11,772 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 388 | — | — | — | 20,826 | — | — | 20,826 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (2,596) | — | — | (2,596) | |||||||||||||||||||||||||||||||||||||||
| Balances as of March 31, 2021 | 53,065 | 53 | (9,894) | (238,109) | 950,361 | 304,849 | (6,143) | 1,011,011 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 20,424 | — | 20,424 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 652 | 652 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 13,039 | — | — | 13,039 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 265 | — | — | — | 11,517 | — | — | 11,517 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (4,071) | — | — | (4,071) | |||||||||||||||||||||||||||||||||||||||
| Balances as of June 30, 2021 | 53,330 | 53 | (9,894) | (238,109) | 970,846 | 325,273 | (5,491) | 1,052,572 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 29,317 | — | 29,317 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (2,299) | (2,299) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 13,666 | — | — | 13,666 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 433 | 1 | — | — | 21,573 | — | — | 21,574 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (3,494) | — | — | (3,494) | |||||||||||||||||||||||||||||||||||||||
| Balances as of September 30, 2021 | 53,763 | $ | 54 | (9,894) | $ | (238,109) | $ | 1,002,591 | $ | 354,590 | $ | (7,790) | $ | 1,111,336 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
7
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 34,056 | $ | 63,868 | |||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |||||||||||
| Depreciation and amortization | 64,843 | 53,140 | |||||||||
| Loss on disposal of property and equipment | 331 | 297 | |||||||||
| Share-based compensation expense | 50,731 | 38,477 | |||||||||
| Deferred income taxes | (17,061) | 2,042 | |||||||||
| Amortization of operating lease right-of-use assets | 9,709 | 8,764 | |||||||||
| Impairment and abandonment of operating lease right-of-use assets related to facilities | 5,390 | — | |||||||||
| Amortization of debt issuance costs | 3,121 | 2,570 | |||||||||
| Amortization of discount on convertible senior notes | — | 13,874 | |||||||||
| Changes in operating assets and liabilities: | |||||||||||
| Accounts receivable and unbilled receivables | (116,895) | (39,561) | |||||||||
| Inventories | (32,269) | (10,138) | |||||||||
| Prepaid expenses | (2,602) | (8,229) | |||||||||
| Other current assets | 6,692 | (1,059) | |||||||||
| Investment in sales-type leases | (17,336) | 2,686 | |||||||||
| Prepaid commissions | 8,801 | (1,030) | |||||||||
| Other long-term assets | 4,189 | 2,567 | |||||||||
| Accounts payable | 2,043 | 33,111 | |||||||||
| Accrued compensation | (27,940) | (12,018) | |||||||||
| Accrued liabilities | 11,678 | 20,149 | |||||||||
| Deferred revenues | 17,667 | 21,225 | |||||||||
| Operating lease liabilities | (10,966) | (9,392) | |||||||||
| Other long-term liabilities | 1,446 | (9,166) | |||||||||
| Net cash provided by (used in) operating activities | (4,372) | 172,177 | |||||||||
| Investing Activities | |||||||||||
| Software development for external use | (9,648) | (24,141) | |||||||||
| Purchases of property and equipment | (33,861) | (17,892) | |||||||||
| Business acquisitions, net of cash acquired | (3,392) | (178,080) | |||||||||
Purchase price adjustments from business acquisitions | 5,484 | — | |||||||||
| Net cash used in investing activities | (41,417) | (220,113) | |||||||||
| Financing Activities | |||||||||||
| Proceeds from issuances under stock-based compensation plans | 39,539 | 53,917 | |||||||||
| Employees’ taxes paid related to restricted stock units | (11,442) | (10,161) | |||||||||
| Change in customer funds, net | (402) | (3,059) | |||||||||
| Stock repurchases | (52,210) | — | |||||||||
| Net cash provided by (used in) financing activities | (24,515) | 40,697 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,425) | (492) | |||||||||
| Net decrease in cash, cash equivalents, and restricted cash | (71,729) | (7,731) | |||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 355,620 | 489,920 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 283,891 | $ | 482,189 | |||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the Condensed Consolidated Balance Sheets: | |||||||||||
| Cash and cash equivalents | $ | 266,402 | $ | 481,549 | |||||||
| Restricted cash included in other current assets | 17,489 | 640 | |||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 283,891 | $ | 482,189 | |||||||
| Supplemental disclosure of non-cash activities | |||||||||||
| Unpaid purchases of property and equipment | $ | 1,473 | $ | 691 | |||||||
| Transfers between inventory and property and equipment, net | $ | 314 | $ | 1,876 | |||||||
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
8
OMNICELL, INC.
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, 2022 and December 31, 2021, the results of operations and comprehensive income for the three and nine months ended September 30, 2022 and 2021, and cash flows for the nine months ended September 30, 2022 and 2021. 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, 2021, filed with the SEC on February 25, 2022, except as discussed in the section entitled “Recently Adopted Authoritative Guidance” below. The Company’s results of operations and comprehensive income for the three and nine months ended September 30, 2022, and cash flows for the nine months ended September 30, 2022 are not necessarily indicative of results that may be expected for the year ending December 31, 2022, 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.
On January 10, 2022, the Company completed its acquisition of Hub and Spoke Innovations Limited (“Hub and Spoke Innovations”). The Condensed Consolidated Financial Statements include the results of operations of this recently acquired company, commencing as of the acquisition date. The significant accounting policies of the acquired business have been aligned to conform to the accounting policies of Omnicell.
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, 2022, 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.
9
Recently Adopted Authoritative Guidance
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) , Debt-Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). The update simplifies the accounting for convertible debt instruments by reducing the number of accounting models and the number of embedded conversion features that could be recognized separately from the primary contract. ASU 2020-06 also enhances transparency and improves disclosures for convertible instruments and earnings per share guidance. ASU 2020-06 also requires the application of the if-converted method for calculating diluted earnings per share and the treasury stock method is no longer permitted for convertible instruments. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company adopted ASU 2020-06 on January 1, 2022, using the modified retrospective method of transition. Upon adoption of ASU 2020-06, the previously separated equity component and associated debt issuance costs for the Company’s outstanding convertible senior notes were reclassified to the liability component, thereby eliminating the subsequent amortization of the debt discount as interest expense. In addition, the Company derecognized the deferred tax liability related to the equity component.
In December 2021, the Company made an irrevocable election under the indenture to require the principal portion of the Company’s convertible senior notes to be settled in cash and any conversion consideration in excess of the principal portion in cash and/or shares of the Company’s common stock at the Company’s option upon conversion. Following the irrevocable election, only the amounts expected to be settled in excess of the principal portion are considered dilutive in calculating earnings per share under the if-converted method.
The Company’s adoption of the update impacted the Condensed Consolidated Balance Sheets at the beginning of the period of adoption as follows:
| January 1, 2022 | |||||||||||||||||
| Pre-ASU 2020-06 Balances | ASU 2020-06 Adoption Impact | Post-ASU 2020-06 Balances | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Long-term deferred tax assets | $ | 15,883 | $ | (452) | $ | 15,431 | |||||||||||
| Convertible senior notes, net | 488,152 | 75,353 | 563,505 | ||||||||||||||
| Long-term deferred tax liabilities | 51,705 | (19,572) | 32,133 | ||||||||||||||
| Additional paid-in capital | 1,024,580 | (72,742) | 951,838 | ||||||||||||||
| Retained earnings | 368,571 | 16,509 | 385,080 | ||||||||||||||
Adoption of the update did not have an impact on the Company’s Condensed Consolidated Statements of Operations or Condensed Consolidated Statements of Cash Flows as of January 1, 2022. Refer to Note 10, Convertible Senior Notes, for further information regarding the Company’s convertible senior notes.
Recently Issued Authoritative Guidance
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The update addresses diversity in practice by requiring that an acquirer recognize and measure contract assets and liabilities acquired in a business combination in accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The guidance will be applied prospectively to acquisitions occurring on or after the effective date. ASU 2021-08 will be effective for the Company beginning January 1, 2023, and early adoption is permitted. The Company is currently evaluating the impact ASU 2021-08 will have on its Condensed Consolidated Financial Statements.
No other recently issued and effective authoritative guidance is expected to have a material impact on the Company’s Condensed Consolidated Financial Statements through the reporting date.
Note 2. Business Combinations
The Company accounted for its acquisitions in accordance with ASC 805, Business Combinations. The tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the respective acquisition dates. Intangible assets eligible for recognition separate from goodwill were those that satisfied either the contractual or legal criterion or the separability criterion, each as set forth in the accounting guidance. The preliminary fair values reflect management’s best estimates based on information available at the respective acquisition dates and may change as additional information is received over the measurement period, which will end no later than one year from the respective acquisition date. The Company
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believes that the fair values assigned to the assets acquired and liabilities assumed are based on reasonable assumptions and estimates that market participants would use. Actual results may differ from these estimates and assumptions.
The Company’s Condensed Consolidated Financial Statements include the results of operations of each acquired company, commencing as of their respective acquisition dates. Acquisition-related costs were expensed as incurred, and are included in selling, general, and administrative expenses in the Company’s Condensed Consolidated Statements of Operations.
2022 Acquisition
Hub and Spoke Innovations
On January 10, 2022, the Company completed the acquisition of all of the outstanding equity interests in Hub and Spoke Innovations, pursuant to the terms and conditions of the Share Purchase Agreement, dated January 10, 2022, by and among Omnicell Limited (a wholly-owned subsidiary of the Company), Hub and Spoke Innovations Limited, and certain beneficial stockholders specified therein for a base purchase price of £2.5 million (approximately $3.4 million based on the exchange rate in effect at the acquisition date), prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The preliminary purchase price transferred for the transaction, net of cash acquired, was £2.5 million (approximately $3.4 million based on the exchange rate in effect at the acquisition date). Of the purchase price transferred, £1.9 million (approximately $2.5 million based on the exchange rate in effect at the acquisition date) was allocated to goodwill; £0.8 million (approximately $1.1 million based on the exchange rate in effect at the acquisition date) was allocated to intangible assets, which included customer relationships; and the remainder was allocated to net assets acquired. The Hub and Spoke Innovations acquisition is expected to complement Omnicell’s total solution technology portfolio for retail pharmacy in the United Kingdom to help pharmacies improve workflows, offer patients 24/7 access to their medications and provide enhanced patient care.
2021 Acquisitions
MarkeTouch Media
On December 31, 2021, the Company completed the acquisition of all of the outstanding equity interests in MarkeTouch Media, LLC (“MarkeTouch Media”) pursuant to the terms and conditions of the Unit Purchase Agreement, dated December 31, 2021, by and among ateb, Inc. (a wholly-owned subsidiary of the Company), MarkeTouch Media, LLC, MarkeTouch Holdings, Inc., Toucan Enterprises, Inc., and certain beneficial stockholders specified therein for a base purchase price of $82.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The MarkeTouch Media acquisition adds mobile and web-based technology and patient engagement solutions, which is expected to expand the footprint of EnlivenHealth® across the retail pharmacy sector, while enhancing potential growth opportunities in new market segments like specialty pharmacy and pharmacy benefits management.
ReCept
On December 29, 2021, the Company completed the acquisition of all outstanding equity securities of ReCept Holdings, Inc. (“ReCept”) pursuant to the terms and conditions of the Agreement and Plan of Merger, dated December 1, 2021, by and among Omnicell, Inc., ReCept Holdings, Inc., Redfish Acquisition Corp, and the representative of the securityholders for a base purchase price of $100.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The addition of ReCept’s specialty pharmacy management services, now a part of the Company’s Specialty Pharmacy Services (“Specialty Pharmacy Services”), for health systems, provider groups, and federally qualified health centers expands Omnicell’s Advanced Services portfolio in an effort to address the growing and complex specialty pharmacy market.
FDS Amplicare
On September 9, 2021, the Company completed the acquisition of all of the outstanding equity interests in RxInnovation, Inc., operating as FDS Amplicare (“FDS Amplicare”), pursuant to the terms and conditions of the Agreement and Plan of Merger, dated July 25, 2021, by and among RxInnovation Inc., Omnicell, Inc., Fleming Acquisition Corp., and the representative of the securityholders for a base purchase price of $177.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The FDS Amplicare® acquisition adds a comprehensive and complementary suite of Software-as-a-Service (“SaaS”) financial management, analytics, and population health solutions to the Company’s EnlivenHealth offering.
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The following tables represent the preliminary allocation of the respective purchase price to the assets acquired and the liabilities assumed by the Company as part of each acquisition included in the Company’s Consolidated Balance Sheets, and is reconciled to the respective purchase price transferred:
FDS Amplicare (1) | ReCept (2) (3) | MarkeTouch Media (4) | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Purchase price transferred: | |||||||||||||||||
| Base purchase price | $ | 177,000 | $ | 100,000 | $ | 82,000 | |||||||||||
| Add: Closing cash | 465 | 6,569 | 237 | ||||||||||||||
| Add: Net working capital adjustment | 1,654 | (7,357) | 147 | ||||||||||||||
| Less: Assumed indebtedness | (653) | (1,973) | (15) | ||||||||||||||
| Total purchase price transferred | $ | 178,466 | $ | 97,239 | $ | 82,369 | |||||||||||
FDS Amplicare (1) | ReCept (Preliminary) (2) (3) | MarkeTouch Media (Preliminary) (4) | |||||||||||||||
| Fair value of assets acquired and liabilities assumed: | |||||||||||||||||
| Cash and cash equivalents | $ | 465 | $ | — | $ | 237 | |||||||||||
| Accounts receivable and unbilled receivables | 5,330 | 2,383 | 2,302 | ||||||||||||||
| Prepaid expenses | 506 | 192 | 96 | ||||||||||||||
| Other current assets | 45 | 12,223 | — | ||||||||||||||
| Total current assets | 6,346 | 14,798 | 2,635 | ||||||||||||||
| Property and equipment | 444 | 172 | 177 | ||||||||||||||
| Operating lease right-of-use assets | 2,252 | 773 | 602 | ||||||||||||||
| Goodwill | 117,784 | 77,394 | 42,273 | ||||||||||||||
| Intangible assets | 70,000 | 28,100 | 38,000 | ||||||||||||||
| Other long-term assets | 51 | 195 | 2,850 | ||||||||||||||
| Total assets | 196,877 | 121,432 | 86,537 | ||||||||||||||
| Accounts payable | 950 | 219 | 473 | ||||||||||||||
| Accrued compensation | 1,312 | 1,756 | — | ||||||||||||||
| Accrued liabilities | 1,497 | 18,499 | 292 | ||||||||||||||
| Deferred revenues | 1,916 | 222 | 347 | ||||||||||||||
| Long-term deferred tax liabilities | 11,686 | 2,883 | — | ||||||||||||||
| Long-term operating lease liabilities | 920 | 614 | 206 | ||||||||||||||
| Other long-term liabilities | 130 | — | 2,850 | ||||||||||||||
| Total liabilities | 18,411 | 24,193 | 4,168 | ||||||||||||||
| Total purchase price | $ | 178,466 | $ | 97,239 | $ | 82,369 | |||||||||||
| Total purchase price, net of cash acquired | $ | 178,001 | $ | 90,670 | $ | 82,132 | |||||||||||
_________________________________________________
(1) During the fourth quarter of 2021, the Company recorded measurement period adjustments of $1.5 million to goodwill, consisting of an increase in intangible assets, accounts receivable and unbilled receivables, and long-term deferred tax liabilities of $0.4 million, $1.1 million, and $0.1 million, respectively, and a net working capital adjustment of $0.1 million. During the nine months ended September 30, 2022, the Company recorded a measurement period adjustments of $0.4 million to goodwill, consisting of an increase in long-term deferred tax liabilities and accrued liabilities of $0.3 million and $0.1 million, respectively.
(2) Closing cash is included in other current assets due to its restrictive nature as cash held for customers.
(3) During the nine months ended September 30, 2022, the Company recorded measurement period adjustments of $4.2 million to goodwill, consisting of a purchase price adjustment of $5.2 million and a decrease in long-term deferred tax liabilities of $0.7 million, partially offset by a decrease to other current assets of $1.7 million.
(4) During the second quarter of 2022, the Company recorded a measurement period adjustment of $0.3 million to goodwill related to a purchase price adjustment.
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The $117.8 million of goodwill arising from the FDS Amplicare acquisition is primarily attributed to future sales of SaaS solutions and FDS Amplicare’s assembled workforce. The $77.4 million of goodwill arising from the ReCept acquisition is primarily attributed to future sales of its offerings and services and ReCept’s assembled workforce. None of the FDS Amplicare and ReCept goodwill is expected to be deductible for tax purposes as these acquisitions were treated as stock acquisitions for U.S. tax purposes. The $42.3 million of goodwill arising from the MarkeTouch Media acquisition is primarily attributed to future sales of SaaS solutions and MarkeTouch Media’s assembled workforce. The full amount of the MarkeTouch Media goodwill is expected to be deductible for tax purposes as this acquisition was treated as an asset acquisition for U.S. tax purposes.
The identifiable intangible assets acquired and their estimated useful lives for amortization are as follows:
FDS Amplicare (1) | ReCept | MarkeTouch Media | |||||||||||||||||||||||||||||||||
| Fair value | Useful life (years) | Fair value | Useful life (years) | Fair value | Useful life (years) | ||||||||||||||||||||||||||||||
| (In thousands, except for years) | |||||||||||||||||||||||||||||||||||
| Customer relationships | $ | 59,900 | 23 | $ | 28,100 | 23 | $ | 34,100 | 26 | ||||||||||||||||||||||||||
| Acquired technology | 7,700 | 5 - 7 | — | — | 2,100 | 4 | |||||||||||||||||||||||||||||
| Backlog | — | — | — | — | 1,800 | 2 | |||||||||||||||||||||||||||||
| Trade names | 2,400 | 5 | — | — | — | — | |||||||||||||||||||||||||||||
| Total purchased intangible assets | $ | 70,000 | $ | 28,100 | $ | 38,000 | |||||||||||||||||||||||||||||
_________________________________________________
(1) During the fourth quarter of 2021, the Company recorded a measurement period adjustment of $0.4 million in customer relationships.
The customer relationships intangible assets represent the fair values of the underlying relationships and agreements with each acquired company’s customers. The acquired technology intangible assets represent the fair values of the portfolio of SaaS solutions that have reached technological feasibility and were part of the respective acquired company’s offerings at their respective acquisition dates. The backlog intangible asset represents contractually committed future billings associated with MarkeTouch Media customer contracts. The trade names intangible asset represents the fair value of brand and name recognition associated with the marketing of certain FDS Amplicare SaaS solutions.
The fair values of the customer relationships and backlog intangible assets were determined based on the excess earnings method, and the fair values of the acquired technology and trade names intangible assets were determined based on the relief-from-royalty method. The key assumptions used in estimating the fair values of intangible assets included forecasted financial information; customer attrition rates; royalty rate of 10.0% for the acquired technology intangible assets for both FDS Amplicare and MarkeTouch Media; royalty rate of 2.0% for the FDS Amplicare trade names intangible asset; discount rate of 13.0% for the FDS Amplicare acquisition; discount rate of 15.0% for the ReCept acquisition; discount rate of 11.5% for the MarkeTouch Media acquisition; and certain other assumptions.
The customer relationships and acquired technology intangible assets are being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained. The backlog and trade names intangible assets are being amortized over their respective estimated useful lives using the straight-line method of amortization.
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Pro Forma Financial Information
The following table presents certain unaudited pro forma consolidated financial information for the three and nine months ended September 30, 2021 as if the FDS Amplicare, ReCept, and MarkeTouch Media acquisitions had been completed on January 1, 2020. The pro forma effects of the Hub and Spoke Innovations acquisition were not material to the Company’s consolidated results of operations. The unaudited pro forma financial information is presented for informational purposes only, and is not indicative of what would have occurred had the acquisitions taken place on those respective dates. The unaudited pro forma financial information combines the historical results of the acquisitions with the Company’s consolidated historical results and includes certain adjustments including, but not limited to, amortization and depreciation of intangible assets and property and equipment acquired; and certain acquisition-related costs incurred.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||
| 2021 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Pro forma revenues | $ | 313,170 | $ | 873,061 | |||||||
| Pro forma net income | $ | 31,157 | $ | 65,050 | |||||||
Note 3. 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 with multi-year co-development plans. Solutions in this category include, but are not limited to, XT Series automated dispensing systems, the XR2 Automated Central Pharmacy System, IVX Station and IV compounding automation solutions.
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.
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, and are designed to improve patient engagement and adherence to prescriptions.
SaaS, subscription software, and technology-enabled 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 inclusive of FDS Amplicare and MarkeTouch Media, 340B solutions, Specialty Pharmacy Services, and services associated with Omnicell One™, Central Pharmacy Dispensing Services, including the XR2 Automated Central Pharmacy System, and Central Pharmacy Compounding Services, including IVX Station and IV compounding automation solutions.
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 | ||||||||||||
Technical services | Over time, as services are provided, typically ratably over the service term | Service | ||||||||||||
Consumables | Point in time, as transfer of control occurs, generally upon shipment to or receipt by customer | Product | ||||||||||||
SaaS, subscription software, and technology-enabled services | Over time, as services are provided | Service | ||||||||||||
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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 $4.8 million and $4.4 million for the three months ended September 30, 2022 and 2021, respectively, and $13.3 million and $12.0 million for the nine months ended September 30, 2022 and 2021, 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, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Connected devices, software licenses, and other | $ | 226,415 | $ | 195,820 | $ | 650,125 | $ | 534,582 | |||||||||||||||
| Technical services | 53,914 | 53,529 | 156,386 | 156,321 | |||||||||||||||||||
| Consumables | 20,150 | 18,150 | 56,121 | 54,424 | |||||||||||||||||||
| SaaS, subscription software, and technology-enabled services | 47,580 | 28,903 | 135,641 | 75,657 | |||||||||||||||||||
| Total revenues | $ | 348,059 | $ | 296,402 | $ | 998,273 | $ | 820,984 | |||||||||||||||
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, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| United States | $ | 315,755 | $ | 271,276 | $ | 898,269 | $ | 738,411 | |||||||||||||||
Rest of world (1) | 32,304 | 25,126 | 100,004 | 82,573 | |||||||||||||||||||
| Total revenues | $ | 348,059 | $ | 296,402 | $ | 998,273 | $ | 820,984 | |||||||||||||||
_________________________________________________
(1) No individual country represented more than 10% of total revenues.
Contract Assets and Contract Liabilities
The following table reflects the Company’s contract assets and contract liabilities:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
Short-term unbilled receivables, net (1) | $ | 28,354 | $ | 17,208 | |||||||
Long-term unbilled receivables, net (2) | 13,815 | 18,084 | |||||||||
| Total contract assets | $ | 42,169 | $ | 35,292 | |||||||
| Short-term deferred revenues, net | $ | 113,925 | $ | 112,196 | |||||||
| Long-term deferred revenues | 34,519 | 20,194 | |||||||||
| Total contract liabilities | $ | 148,444 | $ | 132,390 | |||||||
_________________________________________________
(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.
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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 $113.9 million and $112.2 million include deferred revenues from product sales and service contracts, net of deferred cost of sales of $12.5 million and $22.4 million, as of September 30, 2022 and December 31, 2021, respectively. The short-term deferred revenues from product sales relate to delivered and invoiced products, pending installation and acceptance, expected to occur within the next twelve months. During the three and nine months ended September 30, 2022, the Company recognized revenues of $15.2 million and $104.2 million, respectively, that were included in the corresponding gross short-term deferred revenues balance of $134.6 million as of December 31, 2021.
Long-term deferred revenues include deferred revenues from product and service contracts of $34.5 million and $20.2 million as of September 30, 2022 and December 31, 2021, respectively. Remaining performance obligations are primarily recognized ratably over the remaining term of the contract, generally not more than ten years.
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, 2022 and 2021. Also, there were no customers that accounted for more than 10% of the Company’s accounts receivable balance as of September 30, 2022 and December 31, 2021.
Note 4. Net Income Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares outstanding during the period. In periods of net loss, all potential common shares are anti-dilutive, so diluted net loss per share equals the basic net loss per share. In periods of net income, diluted net income per share is computed by dividing net income for the period by the basic weighted-average number of shares plus any dilutive potential common stock outstanding during the period, using the treasury stock method. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards, and restricted stock units, as well as shares the Company could be obligated to issue from its convertible senior notes and warrants, as described in Note 10, Convertible Senior Notes (pre-ASU 2020-06 adoption). For periods prior to the adoption of ASU 2020-06 on January 1, 2022, the Company applied the treasury stock method to calculate the dilutive impact of the convertible senior notes. Upon adoption of ASU 2020-06, effective January 1, 2022, the Company is required to apply the if-converted method for calculating the dilutive impact of the convertible senior notes. Refer to Note 1, Organization and Summary of Significant Accounting Policies, for further information. Any anti-dilutive weighted-average dilutive shares related to stock award plans, convertible senior notes, and warrants are excluded from the computation of the diluted net income per share.
The basic and diluted net income per share calculations for the three and nine months ended September 30, 2022 and 2021 were as follows:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Net income | $ | 16,774 | $ | 29,317 | $ | 34,056 | $ | 63,868 | |||||||||||||||
| Weighted-average shares outstanding – basic | 44,441 | 43,648 | 44,304 | 43,293 | |||||||||||||||||||
| Effect of dilutive securities from stock award plans | 943 | 2,087 | 1,293 | 2,086 | |||||||||||||||||||
| Effect of convertible senior notes | 435 | 2,156 | 1,162 | 1,816 | |||||||||||||||||||
| Effect of warrants | — | 450 | — | — | |||||||||||||||||||
| Weighted-average shares outstanding – diluted | 45,819 | 48,341 | 46,759 | 47,195 | |||||||||||||||||||
| Net income per share – basic | $ | 0.38 | $ | 0.67 | $ | 0.77 | $ | 1.48 | |||||||||||||||
| Net income per share – diluted | $ | 0.37 | $ | 0.61 | $ | 0.73 | $ | 1.35 | |||||||||||||||
| Anti-dilutive weighted-average shares related to stock award plans | 810 | 64 | 689 | 199 | |||||||||||||||||||
| Anti-dilutive weighted-average shares related to convertible senior notes and warrants | 5,908 | — | 5,908 | 5,908 | |||||||||||||||||||
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Note 5. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $266.4 million and $349.1 million as of September 30, 2022 and December 31, 2021, respectively, consisted of bank accounts and highly-liquid U.S. Government money market funds held in sweep and asset management accounts with major financial institutions. As of September 30, 2022 and December 31, 2021, cash equivalents were $224.7 million and $320.2 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, 2022, the fair value of the convertible senior notes was $610.1 million, compared to their carrying value of $565.8 million, which is net of unamortized debt issuance costs (subsequent to the adoption of ASU 2020-06). As of December 31, 2021, the fair value of the convertible senior notes was $1.085 billion, compared to their carrying value of $488.2 million, which is net of unamortized discount and debt issuance costs and excludes amounts classified within additional paid-in capital (prior to the adoption of ASU 2020-06). 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. Refer to Note 1, Organization and Summary of Significant Accounting Policies, for further information regarding the adoption of ASU 2020-06.
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Note 6. Balance Sheet Components
Balance sheet details as of September 30, 2022 and December 31, 2021 are presented in the tables below:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Inventories: | |||||||||||
| Raw materials | $ | 73,221 | $ | 48,215 | |||||||
| Work in process | 8,970 | 11,009 | |||||||||
| Finished goods | 64,905 | 60,700 | |||||||||
| Total inventories | $ | 147,096 | $ | 119,924 | |||||||
| Other current assets: | |||||||||||
| $ | 35,249 | $ | 20,405 | ||||||||
| Net investment in sales-type leases, current portion | 12,586 | 10,665 | |||||||||
| Prepaid income taxes | 1,846 | 6,656 | |||||||||
| Other current assets | 6,993 | 10,608 | |||||||||
| Total other current assets | $ | 56,674 | $ | 48,334 | |||||||
| Other long-term assets: | |||||||||||
| Capitalized software, net | $ | 85,186 | $ | 96,995 | |||||||
| Unbilled receivables, net | 13,815 | 18,084 | |||||||||
| Deferred debt issuance costs | 2,333 | 3,156 | |||||||||
| Other long-term assets | 9,012 | 9,284 | |||||||||
| Total other long-term assets | $ | 110,346 | $ | 127,519 | |||||||
| Accrued liabilities: | |||||||||||
| $ | 10,658 | $ | 12,947 | ||||||||
| Customer fund liabilities | 35,249 | 31,727 | |||||||||
| Advance payments from customers | 10,214 | 8,191 | |||||||||
| Rebate liabilities | 42,363 | 44,644 | |||||||||
| Group purchasing organization fees | 7,623 | 7,115 | |||||||||
| Taxes payable | 11,327 | 3,771 | |||||||||
| Other accrued liabilities | 29,006 | 24,772 | |||||||||
| Total accrued liabilities | $ | 146,440 | $ | 133,167 | |||||||
_________________________________________________
(1) Includes restricted cash of $17.5 million and $6.6 million as of September 30, 2022 and December 31, 2021, respectively.
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, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Beginning balance | $ | (17,372) | $ | (5,491) | $ | (8,407) | $ | (5,522) | |||||||||||||||
| Other comprehensive loss | (6,770) | (2,299) | (15,735) | (2,268) | |||||||||||||||||||
| Ending balance | $ | (24,142) | $ | (7,790) | $ | (24,142) | $ | (7,790) | |||||||||||||||
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Note 7. Property and Equipment
The following table represents the property and equipment balances as of September 30, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Equipment | $ | 89,429 | $ | 89,272 | |||||||
| Furniture and fixtures | 5,026 | 7,580 | |||||||||
| Leasehold improvements | 19,766 | 20,623 | |||||||||
| Software | 73,913 | 60,856 | |||||||||
| Construction in progress | 23,041 | 14,757 | |||||||||
| Property and equipment, gross | 211,175 | 193,088 | |||||||||
| Accumulated depreciation and amortization | (122,819) | (121,947) | |||||||||
| Total property and equipment, net | $ | 88,356 | $ | 71,141 | |||||||
Depreciation and amortization expense of property and equipment was $5.8 million and $5.2 million for the three months ended September 30, 2022 and 2021, respectively, and $16.7 million and $14.9 million for the nine months ended September 30, 2022 and 2021, 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, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| United States | $ | 84,771 | $ | 66,788 | |||||||
Rest of world (1) | 3,585 | 4,353 | |||||||||
| Total property and equipment, net | $ | 88,356 | $ | 71,141 | |||||||
_________________________________________________
(1) No individual country represented more than 10% of total property and equipment, net.
Note 8. Goodwill and Intangible Assets
Goodwill
The following table represents changes in the carrying amount of goodwill:
| December 31, 2021 | Additions (1) | Measurement Period Adjustments (1) | Foreign currency exchange rate fluctuations | September 30, 2022 | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
| Goodwill | $ | 738,900 | 2,549 | (4,041) | (6,114) | $ | 731,294 | ||||||||||||||||||||||
_________________________________________________
(1) Refer to Note 2, Business Combinations, for further information.
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Intangible Assets, Net
The carrying amounts and useful lives of intangible assets as of September 30, 2022 and December 31, 2021 were as follows:
| September 30, 2022 | |||||||||||||||||||||||||||||
Gross carrying amount (1) | Accumulated amortization | Foreign currency exchange rate fluctuations | Net carrying amount | Useful life (years) | |||||||||||||||||||||||||
| (In thousands, except for years) | |||||||||||||||||||||||||||||
| Customer relationships | $ | 311,089 | $ | (94,108) | $ | (1,880) | $ | 215,101 | 4 - 30 | ||||||||||||||||||||
| Acquired technology | 92,066 | (61,471) | — | 30,595 | 4 - 20 | ||||||||||||||||||||||||
| Backlog | 1,800 | (675) | — | 1,125 | 2 | ||||||||||||||||||||||||
| Trade names | 9,200 | (6,371) | — | 2,829 | 5 - 12 | ||||||||||||||||||||||||
| Patents | 2,430 | (1,276) | — | 1,154 | 2 - 20 | ||||||||||||||||||||||||
| Non-compete agreements | 600 | (400) | — | 200 | 3 | ||||||||||||||||||||||||
| Total intangibles assets, net | $ | 417,185 | $ | (164,301) | $ | (1,880) | $ | 251,004 | |||||||||||||||||||||
| December 31, 2021 | |||||||||||||||||||||||||||||
Gross carrying amount (1) | Accumulated amortization | Foreign currency exchange rate fluctuations | Net carrying amount | Useful life (years) | |||||||||||||||||||||||||
| (In thousands, except for years) | |||||||||||||||||||||||||||||
| Customer relationships | $ | 309,989 | $ | (78,093) | $ | (933) | $ | 230,963 | 10 - 30 | ||||||||||||||||||||
| Acquired technology | 95,466 | (55,859) | 6 | 39,613 | 4 - 20 | ||||||||||||||||||||||||
| Backlog | 1,800 | — | — | 1,800 | 2 | ||||||||||||||||||||||||
| Trade names | 9,200 | (5,600) | 14 | 3,614 | 5 - 12 | ||||||||||||||||||||||||
| Patents | 2,462 | (1,186) | — | 1,276 | 2 - 20 | ||||||||||||||||||||||||
| Non-compete agreements | 600 | (250) | — | 350 | 3 | ||||||||||||||||||||||||
| Total intangibles assets, net | $ | 419,517 | $ | (140,988) | $ | (913) | $ | 277,616 | |||||||||||||||||||||
_________________________________________________
(1) The differences in gross carrying amounts between periods are primarily due to the write-off of certain fully amortized intangible assets, partially offset by additions of intangible assets in connection with the Hub and Spoke Innovations acquisition.
Amortization expense of intangible assets was $8.7 million and $6.3 million for the three months ended September 30, 2022 and 2021, respectively, and $26.7 million and $18.7 million for the nine months ended September 30, 2022 and 2021, respectively.
The estimated future amortization expenses for amortizable intangible assets were as follows:
| September 30, 2022 | |||||
| (In thousands) | |||||
| Remaining three months of 2022 | $ | 8,463 | |||
| 2023 | 31,463 | ||||
| 2024 | 23,015 | ||||
| 2025 | 20,970 | ||||
| 2026 | 18,027 | ||||
| Thereafter | 149,066 | ||||
| Total | $ | 251,004 | |||
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Note 9. Debt and Credit Agreement
2019 Revolving Credit Facility
On November 15, 2019, the Company entered into an Amended and Restated Credit Agreement (as subsequently amended as discussed below, the “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 A&R Credit Agreement superseded the Company’s 2016 secured credit facility and provides for (a) a five-year revolving credit facility of $500.0 million (the “Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to $250.0 million (the “Incremental Facility”). In addition, the 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 A&R Credit Agreement has an expiration date of November 15, 2024, upon which date all remaining outstanding borrowings will be due and payable.
Loans under the Revolving Credit Facility bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR Rate, plus an applicable margin ranging from 1.25% to 2.00% per annum based on the Company’s Consolidated Total Net Leverage Ratio (as defined in the 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) LIBOR for an interest period of one month plus 1.00%, plus an applicable margin ranging from 0.25% to 1.00% per annum based on the Company’s Consolidated Total Net Leverage Ratio. Undrawn commitments under the Revolving Credit Facility are subject to a commitment fee ranging from 0.15% to 0.30% per annum based on the Company’s Consolidated Total Net Leverage Ratio on the average daily unused portion of the Revolving Credit Facility. The applicable margin for, and certain other terms of, any term loans under the Incremental Facility will be determined prior to the incurrence of such loans. The Company is permitted to make voluntary prepayments at any time without payment of a premium or penalty.
On September 22, 2020, the parties entered into an amendment to the A&R Credit Agreement to, among other changes, 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, expand the Company’s flexibility to repurchase its common stock and make other restricted payments, and replace the total net leverage covenant with a new secured net leverage covenant that requires the Company to maintain a consolidated secured net leverage ratio not to exceed 3.50:1 for the calendar quarters ending September 30, 2020, December 31, 2020, and March 31, 2021 and 3.00:1 for the calendar quarters ending thereafter.
The A&R Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, dividends, and other distributions. The A&R Credit Agreement contains financial covenants that require the Company and its subsidiaries to not exceed a maximum total secured net leverage ratio (as described above) and maintain a minimum interest coverage ratio. In addition, the 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. The Company’s obligations under the A&R Credit Agreement and any 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 A&R Credit Agreement, and as a condition precedent to borrowing loans thereunder, the Company and certain of the Company’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 Company was in compliance with all covenants as of September 30, 2022.
As of each of September 30, 2022 and December 31, 2021, there was no outstanding balance for the Revolving Credit Facility.
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
21
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 December 31, 2021, the conditional conversion feature of the Notes was triggered, based on the price of the Company’s common stock, as the last reported sale price of the Company’s common stock was greater than or equal to 130% of the then applicable conversion price for the Notes for at least 20 trading days during the period of 30 consecutive trading days ending on December 31, 2021, the last trading day of the respective fiscal quarter. Accordingly, the Notes were convertible during the first quarter of 2022 and were classified as a current liability in the Consolidated Financial Statements as of December 31, 2021. During the three months ended September 30, 2022, none of the conditional conversion features of the Notes were triggered, and therefore, the Notes are not convertible during the fourth quarter of 2022, commencing on October 1, 2022. Accordingly, the Company classified the Notes as a long-term liability in its Condensed Consolidated Financial Statements as of September 30, 2022. Whether the Notes will be convertible following the fourth fiscal quarter of 2022 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, 2022, none of the criteria for a fundamental change or a conversion rate adjustment had been met.
The Company may not redeem the Notes prior to September 20, 2023. The Company may redeem for cash all or any portion of the Notes, at its option, on or after September 20, 2023, 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.
22
Prior to the adoption of ASU 2020-06, convertible debt instruments that could be settled in cash were required to be separated into liability and equity components. The allocation to the liability component was based on the fair value of a similar instrument that did not contain an equity conversion option. Based on this debt-to-equity ratio, debt issuance costs were then allocated to the liability and equity components in a similar manner. Accordingly, at issuance, the Company allocated $461.8 million to the debt liability and $72.7 million to additional paid-in capital, net of applicable issuance costs and deferred taxes. The difference between the principal amount of the Notes and the liability component, inclusive of issuance costs, represented the debt discount, which the Company amortized to interest expense over the term of the Notes using an effective interest rate of 4.18%. The determination of the discount rate required certain estimates and assumptions.
Upon adoption of ASU 2020-06, effective January 1, 2022, the Notes are no longer separated into liability and equity components, and are accounted for as a single liability measured at its amortized cost. Refer to Note 1, Organization and Summary of Significant Accounting Policies, for further information.
As of September 30, 2022, the remaining life of the Notes and the related issuance cost accretion is approximately 3.0 years.
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, 2022, 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, 2022 and December 31, 2021:
September 30, 2022 (2) | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Liability: | |||||||||||
| Principal amount | $ | 575,000 | $ | 575,000 | |||||||
| Unamortized discount | — | (77,136) | |||||||||
| Unamortized debt issuance costs | (9,197) | (9,712) | |||||||||
Convertible senior notes, liability component (1) | $ | 565,803 | $ | 488,152 | |||||||
| Convertible senior notes, equity component | $ | — | $ | 72,732 | |||||||
_________________________________________________
(1) Classified as a long-term liability as of September 30, 2022, and a current liability as of December 31, 2021, in the Condensed Consolidated Balance Sheets.
(2) Refer to Note 1, Organization and Summary of Significant Accounting Policies, for further information regarding the impact of the adoption of ASU 2020-06, effective January 1, 2022.
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, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
2022 (1) | 2021 | 2022 (1) | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Contractual coupon interest | $ | 359 | $ | 359 | $ | 1,078 | $ | 1,078 | |||||||||||||||
| Amortization of discount | $ | — | $ | 4,679 | $ | — | $ | 13,874 | |||||||||||||||
| Amortization of debt issuance costs | $ | 768 | $ | 589 | $ | 2,298 | $ | 1,747 | |||||||||||||||
_________________________________________________
(1) Refer to Note 1, Organization and Summary of Significant Accounting Policies, for further information regarding the impact of the adoption of ASU 2020-06, effective January 1, 2022.
Convertible Note Hedge and Warrant Transactions
In connection with the issuance of the Notes, 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.
23
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, 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
On a recurring basis, the Company enters into multi-year, sales-type lease agreements, with the majority of such leases varying in length from to five years. Some of the Company’s sales-type leases, mostly those relating to U.S. government hospitals which comprise approximately 39% of the lease receivable balance, and those associated with financed service contracts related to certain Advanced Services products, including Central Pharmacy Dispensing Services and IV compounding automation solutions, are retained in-house. The Company optimizes cash flows by selling many of its remaining sales-type leases 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, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Sales-type lease revenues | $ | 10,115 | $ | 3,892 | $ | 34,033 | $ | 14,503 | |||||||||||||||
| Cost of sales-type lease revenues | (5,357) | (1,699) | (16,963) | (5,678) | |||||||||||||||||||
| Selling profit on sales-type lease revenues | $ | 4,758 | $ | 2,193 | $ | 17,070 | $ | 8,825 | |||||||||||||||
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, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Net minimum lease payments to be received | $ | 52,644 | $ | 31,444 | |||||||
| Less: Unearned interest income portion | (6,251) | (2,388) | |||||||||
| Net investment in sales-type leases | 46,393 | 29,056 | |||||||||
Less: Current portion (1) | (12,586) | (10,665) | |||||||||
| Long-term investment in sales-type leases, net | $ | 33,807 | $ | 18,391 | |||||||
_________________________________________________
(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.
24
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, 2022 | |||||
| (In thousands) | |||||
| Remaining three months of 2022 | $ | 3,782 | |||
| 2023 | 13,314 | ||||
| 2024 | 10,064 | ||||
| 2025 | 8,171 | ||||
| 2026 | 6,387 | ||||
| Thereafter | 10,926 | ||||
| Total future minimum sales-type lease payments | 52,644 | ||||
| Present value adjustment | (6,251) | ||||
| Total net investment in sales-type leases | $ | 46,393 | |||
Operating Leases
The Company entered into certain leasing agreements that were classified as operating leases prior to the adoption of ASC 842, Leases. These agreements in place prior to January 1, 2019 continue to be treated as operating leases; however, any leasing agreements entered into on or after January 1, 2019 under these programs are classified and accounted for as sales-type leases in accordance with ASC 842. The operating lease arrangements generally have initial terms of to seven years.
The following table represents the Company’s income recognized from operating leases for the three and nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Rental income | $ | 2,327 | $ | 2,474 | $ | 7,220 | $ | 8,278 | |||||||||||||||
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 to 12 years. As of September 30, 2022, 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, 2022 | |||||
| (In thousands) | |||||
| Remaining three months of 2022 | $ | 3,279 | |||
| 2023 | 13,089 | ||||
| 2024 | 12,041 | ||||
| 2025 | 9,250 | ||||
| 2026 | 8,723 | ||||
| Thereafter | 14,306 | ||||
| Total operating lease payments | 60,688 | ||||
| Present value adjustment | (8,168) | ||||
Total operating lease liabilities (1) | $ | 52,520 | |||
_________________________________________________
(1) Amount consists of a current and long-term portion of operating lease liabilities of $10.7 million and $41.9 million, respectively. The current portion of the operating lease liabilities is included in in the Condensed Consolidated Balance Sheets.
25
Operating lease costs were $4.0 million and $3.8 million for the three months ended September 30, 2022 and 2021, respectively, and $12.8 million and $11.1 million for the nine months ended September 30, 2022 and 2021, respectively. Short-term lease costs and variable lease costs were immaterial for the three and nine months ended September 30, 2022 and 2021. During the three and nine months ended September 30, 2022, the Company recorded impairment and abandonment charges to operating lease right-of-use assets of $0.3 million and $5.4 million, respectively, in connection with restructuring activities 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.
The following table summarizes supplemental cash flow information related to the Company’s operating leases for the nine months ended September 30, 2022 and 2021:
| Nine Months Ended September 30, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | 13,178 | $ | 11,774 | |||||||
| Right-of-use assets obtained in exchange for new lease liabilities | $ | 12,177 | $ | 2,804 | |||||||
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, 2022 and December 31, 2021:
| September 30, 2022 | December 31, 2021 | ||||||||||
| Weighted-average remaining lease term, years | 5.2 | 5.2 | |||||||||
| Weighted-average discount rate, % | 5.6 | % | 5.5 | % | |||||||
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, 2022, the Company had non-cancelable purchase commitments of $186.9 million, of which $115.9 million are expected to be paid within the year ending December 31, 2022.
Ransomware Incident
On May 4, 2022, the Company determined that certain of its information technology systems were affected by ransomware impacting certain internal systems. Upon detecting the security event, the Company took immediate steps designed to contain the incident and implement its business continuity plans to restore and support continued operations. The Company has contained the incident and restored substantially all of its critical information technology systems.
During the three months ended September 30, 2022, the Company incurred $1.0 million of expenses related to the ransomware incident, and during the nine months ended September 30, 2022, the Company incurred $13.5 million of expenses related to the ransomware incident, partially offset by $11.1 million of expected insurance recoveries. Expenses include costs to investigate and remediate the ransomware incident, as well as legal and other professional services, all of which were expensed as incurred. For the three and nine months ended September 30, 2022, the Company included net expenses related to the ransomware incident in cost of revenues of $0.1 million and $0.3 million, respectively; in research and development of $0.2 million and $0.2 million, respectively; and in selling general and administrative expenses of $0.7 million and $1.9 million, respectively, in the Company’s Condensed Consolidated Statements of Operations.
Legal Proceedings
The Company is currently involved in various legal proceedings.
A class action lawsuit was filed against the Company, on June 5, 2019, in the Circuit Court of Cook County, Illinois, Chancery Division, captioned Corey Heard, individually and on behalf of all others similarly situated v. Omnicell, Inc., Case No. 2019-CH-06817 (the “Heard Action”). The complaint seeks class certification, monetary damages in the form of statutory damages for willful and/or reckless or, in the alternative, negligent violation of the Illinois Biometric Information Privacy Act (“BIPA”), and certain declaratory, injunctive, and other relief based on causes of action directed to allegations of violation of BIPA by the Company. The complaint was served on the Company on June 13, 2019. On July 31, 2019, the Company filed a motion to stay or consolidate the case with the action Yana Mazya, et al. v. Northwestern Lake Forest Hospital, et al., Case No. 2018-CH-07161, pending in the Circuit Court of Cook County, Illinois, Chancery Division (the “Mazya Action”). The Court
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subsequently, on October 10, 2019, denied the motion, without prejudice, as being moot in view of the dismissal of the claims against the Company in the Mazya Action. The Company filed a motion to dismiss the complaint in the Heard Action on October 31, 2019. The hearing on the Company’s motion to dismiss was held on September 2, 2020. The Court ruled from the bench and dismissed the complaint without prejudice giving plaintiff leave to file an amended complaint by September 30, 2020. Plaintiff filed an amended complaint on September 30, 2020 and the Company subsequently filed a motion to dismiss the amended complaint on October 28, 2020, which was fully briefed, but the Court had not heard oral argument on the motion. The parties entered into a settlement agreement on January 25, 2022, (the “Settlement Agreement”). On February 1, 2022, the Court granted preliminary approval of the settlement. Following preliminary approval, plaintiff conducted discovery to identify class members and to determine the class size. Pursuant to the terms of the Settlement Agreement, and following class size discovery, the parties will participate in non-binding mediation, which is currently scheduled for November 21, 2022 to determine if the settlement will move forward. The Court has scheduled an interim status conference for November 30, 2022. Subject to final approval of the settlement, the Company intends to defend the lawsuit vigorously.
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 the legal proceeding described above based on its belief that any potential material loss, while reasonably possible, is not probable. Further, any possible range of loss in this matter cannot be reasonably estimated at this time or is not deemed material. The Company believes that it has valid defenses with respect to the legal proceeding 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 the legal proceeding or because of the diversion of management’s attention and the creation of significant expenses.
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. The annual effective tax rate before discrete items was 17.8% and 28.2% for the nine months ended September 30, 2022 and 2021, respectively.
The Company has executed various global operational centralization activities and legal entity rationalization in recent years. The Company did not recognize any gains or losses from such activities during the nine months ended September 30, 2022, and recognized an immaterial gain from such activities during the nine months ended September 30, 2021. The Company recognized a discrete tax benefit related to equity compensation in the amount of $6.2 million and $14.5 million for the nine months ended September 30, 2022 and 2021, respectively.
The 2022 annual effective tax rate before discrete items differed from the statutory rate of 21% primarily due to the favorable impact of the research and development credits and foreign-derived intangible income benefit (“FDII”) deduction, partially offset by unfavorable impact of state income taxes, non-deductible compensation and equity charges, and Global Intangible Low-Taxed Income tax inclusion. The 2021 annual effective tax rate before discrete items differed from the statutory rate of 21% primarily due to the unfavorable impact of state income taxes, non-deductible compensation and equity charges, and non-deductible transaction costs related to merger and acquisition activities, partially offset by the favorable impact of research and development credits and an FDII deduction.
On August 16, 2022, the Inflation Reduction Act of 2022, (the “IRA”), was signed into law. Among other things, the IRA imposes a 15% corporate alternative minimum tax for tax years beginning after December 31, 2022, levies a 1% excise tax on net stock repurchases after December 31, 2022, and provides tax incentives to promote clean energy. The Company is in the process of analyzing the potential impacts of the IRA’s provisions. However, these provisions are not currently expected to have a material impact on the Company’s results of operations or financial position.
On March 11, 2021, the President of the United States signed into law the “American Rescue Plan Act of 2021” (the “ARP Act”), which provides additional economic stimulus and tax credits, including the expansion and modification of the employee retention tax credit enacted by the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) and the refundable tax credits for COVID-related paid sick and family leave enacted by the Family First Act. The ARP Act further expands the “covered employees” definition for purposes of Section 162(m) of the Internal Revenue Code of 1986, as amended, used in determining the limitation on the deduction for excessive employee remuneration rules to be applicable for taxable years beginning after December 31, 2026. The provisions of the ARP Act did not have a material impact on the Company’s income taxes.
As of September 30, 2022 and December 31, 2021, the Company had gross unrecognized tax benefits of $9.4 million and $9.0 million, respectively. It is the Company’s policy to classify accrued interest and penalties as part of unrecognized tax benefits, but to record them in interest and other income (expense), net in the Condensed Consolidated Statements of
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Operations. As of September 30, 2022 and December 31, 2021, the amount of accrued interest and penalties was $0.4 million and $0.6 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, Netherlands, and the United Kingdom. With few exceptions, as of September 30, 2022, the Company was no longer subject to U.S., state, and foreign tax examinations for years before 2018, 2017, and 2017, 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
Stock-Based Plans
For a detailed explanation of the Company’s stock plans, refer to Note 14, Employee Benefits and Share-Based Compensation, of 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, 2021, filed with the SEC on February 25, 2022.
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, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||
| Cost of product and service revenues | $ | 2,203 | $ | 1,909 | $ | 6,607 | $ | 5,890 | |||||||||||||||
| Research and development | 3,054 | 1,998 | 7,912 | 5,429 | |||||||||||||||||||
| Selling, general, and administrative | 12,053 | 9,759 | 36,212 | 27,158 | |||||||||||||||||||
| Total share-based compensation expense | $ | 17,310 | $ | 13,666 | $ | 50,731 | $ | 38,477 | |||||||||||||||
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, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Expected life, years | 0.5 - 2.0 | 0.5 - 2.0 | 0.5 - 2.0 | 0.5 - 2.0 | |||||||||||||||||||
| Expected volatility, % | 28.8% - 44.8% | 27.4% - 46.6% | 28.8% - 45.6% | 27.4% - 53.5% | |||||||||||||||||||
| Risk-free interest rate, % | 0.1% - 3.2% | 0.1% - 1.5% | 0.1% - 3.2% | 0.1% - 2.6% | |||||||||||||||||||
| Dividend yield, % | — | % | — | % | — | % | — | % | |||||||||||||||
For the nine months ended September 30, 2022 and 2021, employees purchased approximately 316,000 and 287,000 shares of common stock, respectively, under the ESPP at a weighted-average price of $67.63 and $62.14, respectively. As of September 30, 2022, the unrecognized compensation cost related to the shares to be purchased under the ESPP was approximately $3.9 million and is expected to be recognized over a weighted-average period of 1.5 years.
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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, 2021. There were no stock options granted during the three and nine months ended September 30, 2022, and the three months ended September 30, 2021.
| Nine Months Ended September 30, | |||||
| 2021 | |||||
| Expected life, years | 4.9 | ||||
| Expected volatility, % | 30.1 | % | |||
| Risk-free interest rate, % | 0.6 | % | |||
| Estimated forfeiture rate, % | 7.9 | % | |||
| Dividend yield, % | — | % | |||
The following table summarizes the stock option activity during the nine months ended September 30, 2022:
| Number of Shares | Weighted-Average Exercise Price | Weighted-Average Remaining Years | Aggregate Intrinsic Value | ||||||||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||||||||
| Outstanding at December 31, 2021 | 2,954 | $ | 67.35 | 6.9 | $ | 334,119 | |||||||||||||||||
| Granted | — | — | |||||||||||||||||||||
| Exercised | (341) | 53.24 | |||||||||||||||||||||
| Expired | (6) | 74.37 | |||||||||||||||||||||
| Forfeited | (109) | 85.49 | |||||||||||||||||||||
| Outstanding at September 30, 2022 | 2,498 | $ | 68.47 | 6.3 | $ | 53,660 | |||||||||||||||||
| Exercisable at September 30, 2022 | 1,792 | $ | 62.36 | 5.8 | $ | 47,120 | |||||||||||||||||
| Vested and expected to vest at September 30, 2022 and thereafter | 2,446 | $ | 68.08 | 6.3 | $ | 53,202 | |||||||||||||||||
The weighted-average fair value per share of options granted during the nine months ended September 30, 2021 was $33.89. The intrinsic value of options exercised during the three months ended September 30, 2022 and 2021 was $7.6 million and $26.0 million, respectively, and during the nine months ended September 30, 2022 and 2021 was $23.1 million and $56.8 million, respectively.
As of September 30, 2022, total unrecognized compensation cost related to unvested stock options was $20.1 million, which is expected to be recognized over a weighted-average vesting period of 1.6 years.
Restricted Stock Units (“RSUs”)
The following table summarizes the RSU activity under the 2009 Plan during the nine months ended September 30, 2022:
| 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, 2021 | 763 | $ | 119.93 | 1.6 | $ | 137,696 | |||||||||||||||||
| Granted (Awarded) | 663 | 117.63 | |||||||||||||||||||||
| Vested (Released) | (197) | 107.82 | |||||||||||||||||||||
| Forfeited | (90) | 124.71 | |||||||||||||||||||||
| Outstanding and unvested at September 30, 2022 | 1,139 | $ | 120.30 | 1.7 | $ | 99,156 | |||||||||||||||||
As of September 30, 2022, total unrecognized compensation cost related to RSUs was $111.1 million, which is expected to be recognized over the remaining weighted-average vesting period of 3.2 years.
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Restricted Stock Awards (“RSAs”)
The following table summarizes the RSA activity under the 2009 Plan during the nine months ended September 30, 2022:
| Number of Shares | Weighted-Average Grant Date Fair Value | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Outstanding at December 31, 2021 | 11 | $ | 137.36 | ||||||||
| Granted (Awarded) | 13 | 109.39 | |||||||||
| Vested (Released) | (11) | 137.36 | |||||||||
| Outstanding and unvested at September 30, 2022 | 13 | $ | 109.39 | ||||||||
As of September 30, 2022, 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, 2022:
| Number of Shares | Weighted-Average Grant Date Fair Value Per Unit | ||||||||||
| (In thousands, except per share data) | |||||||||||
| Outstanding at December 31, 2021 | 144 | $ | 118.71 | ||||||||
| Granted | 78 | 155.27 | |||||||||
| Additional granted based on performance achievement | 51 | 156.79 | |||||||||
| Vested | (87) | 119.09 | |||||||||
| Forfeited | (14) | 145.80 | |||||||||
| Outstanding and unvested at September 30, 2022 | 172 | $ | 144.30 | ||||||||
As of September 30, 2022, total unrecognized compensation cost related to PSUs was approximately $8.8 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.2 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, 2022:
| Number of Shares | |||||
| (In thousands) | |||||
| Share options outstanding | 2,498 | ||||
| Non-vested restricted stock awards | 1,324 | ||||
| Shares authorized for future issuance | 1,433 | ||||
| ESPP shares available for future issuance | 603 | ||||
| Total shares reserved for future issuance | 5,858 | ||||
Stock Repurchase Programs
On August 2, 2016, the Company’s Board of Directors (the “Board”) authorized a stock repurchase program providing for the repurchase of up to $50.0 million of the Company’s common stock (the “2016 Repurchase Program”). The 2016 Repurchase Program is in addition to the stock repurchase program approved by the Board on November 4, 2014 providing for the repurchase of up to $50.0 million of the Company’s common stock (the “2014 Repurchase Program”). During the first quarter of 2022, the 2014 Repurchase Program was completed, and as of September 30, 2022, the maximum dollar value of shares that may yet be purchased under the 2016 Repurchase Program was $2.7 million. The 2016 Repurchase Program does
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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 nine months ended September 30, 2022, the Company repurchased approximately 389,300 shares of its common stock under the repurchase programs at an average price of $134.11 per share for an aggregate purchase price of approximately $52.2 million. During the three months ended September 30, 2022 and three and nine months ended September 30, 2021, the Company did not repurchase any of its outstanding common stock under the repurchase programs.
Note 16. Restructuring Expenses
During 2020, the Company announced a company-wide organizational realignment initiative in order to more effectively align its organizational infrastructure and operations with the industry vision of the Autonomous Pharmacy. In the first quarter of 2021, the Company continued its organizational realignment initiative, incurring $2.0 million of employee severance costs and related expenses.
During the first quarter of 2022, the Company initiated certain domestic and international restructuring initiatives, in order to enhance and streamline certain engineering functions for its domestic operations, and to realign its international sales organization to better serve its customers in various international markets. During the third quarter of 2022, the Company initiated restructuring initiatives associated with the integration and functionalization of certain acquisitions, primarily the 340B Link business acquisition, to further accelerate the expansion of the Company’s pharmacy inventory management capabilities. During the three and nine months ended September 30, 2022, the restructuring plans incurred $1.8 million and $5.3 million, respectively, of employee severance costs and related expenses. As of September 30, 2022, the unpaid balance related to these restructuring plans was $2.2 million.
The following table summarizes the total restructuring expense recognized in the Company’s Condensed Consolidated Statements of Operations for the three months ended September 30, 2022 and the nine months ended September 30, 2022 and 2021:
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||
| 2022 | 2022 | 2021 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Cost of product and service revenues | $ | 444 | $ | 600 | $ | 389 | |||||||||||
| Research and development | 272 | 1,866 | 105 | ||||||||||||||
| Selling, general, and administrative | 1,078 | 2,855 | 1,526 | ||||||||||||||
| Total restructuring expense | $ | 1,794 | $ | 5,321 | $ | 2,020 | |||||||||||
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 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 about the continuing impact of the ongoing COVID-19 pandemic on our workforce and operations (including new variants of the virus) and associated efforts to contain the spread of the pandemic, as well as the continuing impacts on our customers and suppliers, and the anticipated continuing effects of the COVID-19 pandemic and associated containment measures on our business, financial condition, liquidity, and results of operations;
•our statements relating to the Company’s containment of the impacts of the recent ransomware incident and any further impact on the Company;
•our expectations regarding our future sales pipeline and product bookings;
•the extent and timing of future revenues, including the amounts of our current backlog;
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•the size or growth of our market or market share;
•our beliefs about drivers of demand for our solutions, market opportunities in certain product categories, and continued expansion in these product categories, as well as our belief that our technology, services, and solutions within these categories position us well to address the needs of retail, acute, and post-acute pharmacy providers;
•our expectation to continue to acquire companies, businesses, products, or technologies;
•our goal of advancing our platform with new product introductions;
•our goal to deliver on the industry vision of the Autonomous Pharmacy, as well as our plan to integrate our current offerings and technologies on a cloud infrastructure and invest in broadening our solutions across certain key areas as we execute on this vision;
•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 belief that our solutions and vision for fully autonomous medication management are strongly aligned with long-term trends in the healthcare market and well-positioned to address the evolving needs of healthcare institutions;
•opportunities presented by new products, services, and markets;
•our ability to secure adequate supplies of raw materials and components utilized in the manufacture of our products of a quality that we require and at acceptable prices;
•our ability to align our cost structure and headcount with our current business expectations;
•the bookings, revenues, non-GAAP EBITDA, non-GAAP operating margin, or non-GAAP earnings per share goals we may set;
•our projected target long-term revenues and revenue growth rates, long-term non-GAAP operating margin targets, long-term non-GAAP EBITDA margin targets, and free cash flow conversion;
•our expected future uses of cash, including our expected uses for the remaining proceeds of our convertible senior notes, and the sufficiency of our sources of funding; and
•our ability to generate cash from operations and our estimates regarding the sufficiency of our cash resources.
In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “seeks,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “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, including in Part II - Item 1A. “Risk Factors” and Part I - Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. You should carefully read this Quarterly Report and the documents that we reference in this Quarterly Report and have filed as exhibits, as well as other documents we file with, or furnish to, the U.S. Securities and Exchange Commission (“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 represent our estimates and assumptions only as of the date of this Quarterly Report. 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, even if new information becomes available in the future.
Other Information
All references in this Quarterly Report on Form 10-Q to “Omnicell,” “our,” “us,” “we,” or “the Company” refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries, collectively. The term “Omnicell, Inc.” refers only to Omnicell, Inc., excluding its subsidiaries.
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We own various registered and unregistered trademarks and service marks used in our business, some of which appear in this Quarterly Report, including Omnicell®. This Quarterly Report 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 elevating the role of pharmacy within healthcare and transforming medication management as an essential component of the pharmacy care delivery model. We are doing so with an industry-leading comprehensive intelligent infrastructure, bringing together technology, analytics, and expert services to equip and empower pharmacists and pharmacies to focus on clinical care rather than administrative tasks. We believe this intelligent infrastructure provides the critical foundation for realizing the industry vision of the Autonomous Pharmacy, a vision defined by pharmacy leaders for improving operational efficiencies and ultimately targeting zero-error medication management.
Facilities worldwide use our automation and analytics solutions to increase operational efficiency, reduce medication errors, deliver actionable intelligence, and improve patient safety. Institutional and retail pharmacies across North America, the United Kingdom, Germany, and Australia leverage our innovative medication adherence and population health solutions to improve patient engagement and adherence to prescriptions, helping to reduce costly hospital readmissions. We sell our product and consumable solutions together with related service offerings. Revenues generated in the United States represented 91% and 92% of our total revenues for the three months ended September 30, 2022 and 2021, respectively, and 90% of our total revenues for both the nine months ended September 30, 2022 and 2021.
Over the past several years, our business has expanded from a single-point solution to a platform of products and services that we believe 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.
We utilize product bookings as an indicator of the success of our business. Product bookings generally consist of firm orders other than for technical services and other less significant items, as evidenced generally by a non-cancelable contract and purchase order for equipment, software products, and Advanced Services, and by a purchase order or through our Omnicell Storefront online ordering platform for consumables. A significant portion of our connected devices and software license product bookings are installable within twelve months of booking, and are recorded as revenue upon customer acceptance of the installation or receipt of goods. Revenues from software-as-a-service (“SaaS”), subscription software, and technology-enabled services product bookings are recorded over the contractual term.
In addition to product solution sales, we provide a range of services to our customers. We provide installation planning and consulting as part of most product sales, which is generally included in the initial price of the solution. We also provide Advanced Services such as Omnicell One, EnlivenHealth, 340B solutions, Specialty Pharmacy Services, Central Pharmacy Dispensing Services, and Central Pharmacy Compounding Services. To help assure the maximum availability of our systems, our customers typically purchase maintenance and support contracts in increments of one to five years. As a result of the growth of our installed base of customers and expanded service offerings, our service revenues have also grown.
The following table summarizes each revenue category:
Revenue Category | Revenue Type (1) | Income Statement Classification | Included in Product Bookings | |||||||||||||||||
Connected devices, software licenses, and other | High visibility/ Nonrecurring | Product | Yes (2) | |||||||||||||||||
Technical services | High visibility/ Recurring | Service | No | |||||||||||||||||
Consumables | High visibility/ Recurring | Product | Yes | |||||||||||||||||
SaaS, subscription software, and technology-enabled services | High visibility/ Recurring | Service | Yes | |||||||||||||||||
_________________________________________________
(1) All revenue types are highly visible from long-term, sole-source agreements, backlog, or the recurring nature of the revenue stream.
(2) Freight revenue and certain other insignificant revenue streams are not included in product bookings.
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Our full-time employee headcount was approximately 4,160 and 3,800 on September 30, 2022 and December 31, 2021, 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
We are committed to being the care providers’ and retail pharmacies’ most trusted partner and executing on the industry vision of the Autonomous Pharmacy by developing and delivering an intelligent medication management infrastructure composed of devices, digital workflows, analytics, and experts, all powered by the cloud. We believe there are significant challenges facing the pharmacy practice today including, but not limited to, labor shortages, medication errors, drug shortages, medication loss due to drug diversion, significant medication waste and expiration costs, a high level of manual steps in the medication management process, complexity around compliance requirements, high pharmacy employee turnover rates affecting tenure and expertise, hospitalizations from adverse drug events in outpatient settings, high variability in outcomes, and limited inventory visibility. We believe that these significant challenges to the pharmacy practice drive the demand for increased digitization, visibility, and insights that our solutions enable, and represent large opportunities in four market categories:
•Point of Care. As a market leader, we expect to continue expansion of this product category as customers increase use of our dispensing systems in more areas within their hospitals. We are more than halfway through the replacement, upgrade, and expansion cycle of older models of automated dispensing systems with our XT Series automated dispensing systems within our own customer base, which we believe is a significant market opportunity. We have been successful penetrating markets through competitive conversions and expect this success to continue. We also believe there is an opportunity for us to define a new standard of care for dispensing systems in perioperative settings. We believe our current portfolio within the Point of Care market and new innovation and services will continue to drive improved outcomes and lower costs for our customers.
•Central Pharmacy. This market represents the beginning of the medication management process in acute care settings, and, we believe, the next big automation opportunity to replace high volumes of manual and repetitive processes that are common in pharmacies today. Manual processes are prone to significant errors, and products such as IVX Workflow, our IV Sterile Compounding Service (including IV robotics), and our Central Pharmacy Dispensing Service (including the XR2 Automated Central Pharmacy System), automate these manual processes and are designed to reduce the risk of error for our healthcare partners. Because automation adoption in the Central Pharmacy is still nascent, we believe that the adoption of solutions will be accelerated by bundling those solutions with technology-enabled services that are designed to deliver specific outcomes and leverage intelligence across the enterprise for more actionable insights, and are expected to reduce administrative burden, allowing clinicians to operate at the top of their license. We think that these bundled solutions are becoming more critical than ever as health systems continue to face increasing labor shortages and supply chain disruptions. Additionally, we believe new products, innovations and our expertise in the Central Pharmacy market create opportunities to replace prior generation Central Pharmacy robotics, especially when combining those robotics with carousels and technology-enabled services to increase the percentage of medication managed through the intelligent infrastructure.
•Specialty Pharmacy and 340B Program. We believe that health systems will invest in more revenue generating activities that improve patient outcomes, and pharmacy will be at the center with specialty pharmacies and the 340B Drug Pricing Program.
Studies have shown that specialty medications represent over 50% of the country’s total spending on retail, mail-order, and provider-administered drugs. Used for treatment of complex conditions, these medications often require intensive patient management and specialized workflows for dispensing and care coordination. Specialty pharmacies serve as the connection between patients, prescribing physicians, and payors to ensure streamlined access and adherence to these specialty drugs, helping to maintain continuity of care throughout the process, and are expected to improve margin and profitability for the health system. Specialty Pharmacy Services is a turnkey offering with dedicated services to set up, operate, and optimize a specialty pharmacy program, and is designed to help health systems launch and/or optimize a fully managed, hospital-owned specialty pharmacy. Our Specialty
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Pharmacy Services solution is intended to deliver: (i) improved access to specialty medications to enhance care and support patient outcomes; (ii) financial outcomes for customers through a ‘value-based’ service model that is expected to drive financial results and (iii) a single vendor that provides the technology, services, and broad expertise to support medication management needs from hospital to home.
The 340B market is targeted to covered entities participating in Section 340B of the Public Health Services Act. The Public Health Services Act requires pharmaceutical manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to healthcare organizations that care for many uninsured and low-income patients and creates a complex compliance environment. According to the Health Resources and Services Administration, which is responsible for administering the 340B program, enrolled hospitals and other covered entities can achieve an average savings of 25% to 50% in pharmaceutical purchases. Due to the complexities of adhering to the administrative process of the 340B program, as well as potential drug manufacturer actions further complicating the 340B program landscape, we believe that there are significant opportunities for health systems to improve participation benefits and maximize program savings through our 340B technology-enabled services.
•Retail, Institutional, and Payer. We believe the retail, institutional, and payer market represents a significant opportunity as healthcare evolves. A majority of all prescription drugs are distributed in the non-acute sector. The COVID-19 pandemic accelerated the shift of primary healthcare settings from hospitals and doctors’ offices to other convenient channels like the home, digital, and retail pharmacies. New technology and updated state board regulations are leading to innovation at traditional retail providers, which, combined with the move to value-based care, we believe will incentivize the market to adopt solutions to help providers and payers engage patients in new ways that improve patient care and reduce the total cost of care. We believe adoption of our EnlivenHealth portfolio of software products and services, along with medication adherence packaging, will increase adherence performance rates, increase prescription volume for our customers, and reduce hospital and emergency room visits due to improved adherence. Our EnlivenHealth portfolio has been expanded with two recent acquisitions that will assist in adoption and drive innovation. RxInnovation Inc., operating as FDS Amplicare (“FDS Amplicare”), is a leading provider of financial management, analytics, and population health solutions to the retail pharmacy industry, including independent pharmacies. MarkeTouch Media, LLC (“MarkeTouch Media”) has longstanding pharmacy chain relationships that further broaden EnlivenHealth’s national pharmacy network.
We believe our technology, services, and solutions within these market categories position us well to address the needs of acute, post-acute, ambulatory, and retail pharmacy providers and health plans.
COVID-19 Update
We continue to closely monitor the COVID-19 pandemic and ongoing impacts on the Company. At the outset of the COVID-19 pandemic, many health systems faced financial and operational pressures which we believe led our customers to delay or defer purchasing decisions and/or implementation of our solutions. However, our customers have generally returned to pre-pandemic purchasing patterns consistent with long-term strategic investments. We believe that the challenges that our customers have faced during the COVID-19 pandemic, including the need for robust visibility throughout their pharmacy supply chains, have increased the strategic relevance of our products and services.
COVID-19 vaccines are now available and being widely distributed. Despite this, there remains uncertainty regarding the duration and severity of the continuing impact of the pandemic, including the impact of new variants of the COVID-19 virus, on the U.S. and world economies, as well as on our business. We continue to carefully monitor this dynamic situation and may adjust our outlook as appropriate. The ongoing impact of the COVID-19 pandemic may adversely affect our business, results of operations, financial condition, and liquidity (including increased borrowing costs or other costs of capital). However, under current circumstances, we believe that our financial position and resources will allow us to manage the anticipated impact of the COVID-19 pandemic on our business for the foreseeable future.
Ransomware Incident
On May 4, 2022, we determined that certain of our information technology systems were affected by ransomware impacting certain internal systems. Upon detecting the security event, we took immediate steps designed to contain the incident and implement our business continuity plans to restore and support continued operations. We have contained the incident and restored substantially all of our critical information technology systems. As a result of the ransomware incident, invoicing was delayed, which impacted the timing of cash collections and free cash flow in the second quarter of 2022. In addition, total revenues were slightly below expectations for the second quarter of 2022 as customer implementations were delayed due to the ransomware incident. During the third quarter of 2022, we continued to experience implementation delays as we recovered from the impacts of the ransomware incident. As of the end of the third quarter of 2022, a majority of the delayed implementations from the second quarter of 2022 have been implemented or are expected to be implemented in the fourth
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quarter of 2022. Furthermore, as of the end of the third quarter of 2022, any delayed or impacted processes have returned to normal operations. We do not believe the security event will have a material adverse effect on our business, results of operations, or financial condition.
Acquisitions
On January 10, 2022, we completed the acquisition of Hub and Spoke Innovations, pursuant to the terms and conditions of the Share Purchase Agreement, dated January 10, 2022, by and among Omnicell Limited (a wholly-owned subsidiary of the Company), Hub and Spoke Innovations Limited, and certain beneficial stockholders specified therein for a base purchase price of £2.5 million (approximately $3.4 million based on the exchange rate in effect at the acquisition date), prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The Hub and Spoke Innovations acquisition is expected to complement Omnicell’s total solution technology portfolio for retail pharmacy in the United Kingdom to help pharmacies improve workflows, offer patients 24/7 access to their medications and provide enhanced patient care. The results of the operations of Hub and Spoke Innovations have been included in our consolidated results of operations beginning January 10, 2022.
On December 31, 2021, we completed the acquisition of MarkeTouch Media pursuant to the terms and conditions of the Unit Purchase Agreement, dated December 31, 2021, by and among ateb, Inc. (a wholly-owned subsidiary of the Company), MarkeTouch Media, LLC, MarkeTouch Holdings, Inc., Toucan Enterprises, Inc., and certain beneficial stockholders specified therein for a base purchase price of $82.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The MarkeTouch Media acquisition adds mobile and web-based technology and patient engagement solutions, which is expected to expand the footprint of EnlivenHealth across the retail pharmacy sector, while enhancing potential growth opportunities in new market segments like specialty pharmacy and pharmacy benefits management. The results of the operations of MarkeTouch Media have been included in our consolidated results of operations beginning December 31, 2021.
On December 29, 2021, we completed the acquisition of ReCept pursuant to the terms and conditions of the Agreement and Plan of Merger, dated December 1, 2021, by and among Omnicell, Inc., ReCept Holdings, Inc., Redfish Acquisition Corp, and the representative of the securityholders for a base purchase price of $100.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The addition of ReCept’s specialty pharmacy management services, now a part of the Company’s Specialty Pharmacy Services, for health systems, provider groups, and federally qualified health centers expands Omnicell’s Advanced Services portfolio in an effort to address the growing and complex specialty pharmacy market. The results of the operations of ReCept have been included in our consolidated results of operations beginning December 29, 2021.
On September 9, 2021, we completed the acquisition of FDS Amplicare pursuant to the terms and conditions of the Agreement and Plan of Merger, dated July 25, 2021, by and among RxInnovation Inc., Omnicell, Inc., Fleming Acquisition Corp., and the representative of the securityholders for a base purchase price of $177.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness. The FDS Amplicare acquisition adds a comprehensive and complementary suite of SaaS financial management, analytics, and population health solutions to our EnlivenHealth offering. The results of the operations of FDS Amplicare have been included in our consolidated results of operations beginning September 9, 2021.
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;
•Allowance for credit losses for accounts receivable and unbilled receivables;
•Leases;
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•Inventory;
•Software development costs;
•Valuation and impairment of goodwill and intangible assets;
•Business combinations;
•Convertible senior notes;
•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, 2022 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, 2021, except as discussed in “Recently Adopted Authoritative Guidance” in Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
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.
RESULTS OF OPERATIONS
Total Revenues
| Three Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Product revenues | $ | 246,565 | $ | 213,970 | $ | 32,595 | 15% | ||||||||||||||||
| Percentage of total revenues | 71% | 72% | |||||||||||||||||||||
| Services and other revenues | 101,494 | 82,432 | 19,062 | 23% | |||||||||||||||||||
| Percentage of total revenues | 29% | 28% | |||||||||||||||||||||
| Total revenues | $ | 348,059 | $ | 296,402 | $ | 51,657 | 17% | ||||||||||||||||
Product revenues represented 71% and 72% of total revenues for the three months ended September 30, 2022 and 2021, respectively. Product revenues increased by $32.6 million, due to increased customer demand, primarily within our automated dispensing systems business, and increased revenues from our XR2 Automated Central Pharmacy Systems.
Services and other revenues represented 29% and 28% of total revenues for the three months ended September 30, 2022 and 2021, respectively. Services and other revenues include revenues from technical services; SaaS, subscription software, and technology-enabled services; and other services. Services and other revenues increased by $19.1 million, primarily due to incremental revenues from our recent acquisitions of FDS Amplicare, ReCept, and MarkeTouch Media, as well as continued growth in our installed customer base and our expanded portfolio of services and solutions. The increase was partially offset by a decrease in revenues from 340B solutions primarily due to impacts from decreasing provider utilization of the 340B program as a result of recent drug manufacturer actions.
Our international sales represented 9% and 8% of total revenues for the three months ended September 30, 2022 and 2021, 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.
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| Nine Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Product revenues | $ | 706,246 | $ | 589,006 | $ | 117,240 | 20% | ||||||||||||||||
| Percentage of total revenues | 71% | 72% | |||||||||||||||||||||
| Services and other revenues | 292,027 | 231,978 | 60,049 | 26% | |||||||||||||||||||
| Percentage of total revenues | 29% | 28% | |||||||||||||||||||||
| Total revenues | $ | 998,273 | $ | 820,984 | $ | 177,289 | 22% | ||||||||||||||||
Product revenues represented 71% and 72% of total revenues for the nine months ended September 30, 2022 and 2021, respectively. Product revenues increased by $117.2 million, due to increased customer demand, primarily within our automated dispensing systems business, as well as increased revenues from our IV solutions and XR2 Automated Central Pharmacy Systems.
Services and other revenues represented 29% and 28% of total revenues for the nine months ended September 30, 2022 and 2021, respectively. Services and other revenues include revenues from technical services; SaaS, subscription software, and technology-enabled services; and other services. Services and other revenues increased by $60.0 million, primarily due to incremental revenues from our recent acquisitions of FDS Amplicare, ReCept, and MarkeTouch Media, as well as continued growth in our installed customer base and our expanded portfolio of services and solutions. The increase was partially offset by a decrease in revenues from 340B solutions primarily due to impacts from decreasing provider utilization of the 340B program as a result of recent drug manufacturer actions.
Our international sales represented 10% of total revenues for both the nine months ended September 30, 2022 and 2021, 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, warranty, provisions for excess and obsolete inventory, and amortization of software development costs and intangibles.
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| Three Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Cost of product revenues | $ | 134,023 | $ | 110,743 | $ | 23,280 | 21% | ||||||||||||||||
| As a percentage of related revenues | 54% | 52% | |||||||||||||||||||||
| Cost of services and other revenues | 54,941 | 38,880 | 16,061 | 41% | |||||||||||||||||||
| As a percentage of related revenues | 54% | 47% | |||||||||||||||||||||
| Total cost of revenues | $ | 188,964 | $ | 149,623 | $ | 39,341 | 26% | ||||||||||||||||
| As a percentage of total revenues | 54% | 50% | |||||||||||||||||||||
| Gross profit | $ | 159,095 | $ | 146,779 | $ | 12,316 | 8% | ||||||||||||||||
| Gross margin | 46% | 50% | |||||||||||||||||||||
Cost of revenues for the three months ended September 30, 2022 compared to the three months ended September 30, 2021 increased by $39.3 million, of which $23.3 million was attributed to the increase in cost of product revenues and $16.1 million was attributed to the increase in cost of services and other revenues.
The increase in cost of product revenues was primarily driven by the increase in product revenues of $32.6 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was also driven by inventory-related costs due to inflationary impacts, as well as higher employee-related and travel expenses due to increased headcount. This increase was partially offset by the benefits associated with economies of scale due to higher volumes during the three months ended September 30, 2022 compared to the three months ended September 30, 2021.
The increase in cost of services and other revenues was primarily driven by the increase in services and other revenues of $19.1 million, including incremental revenues from our recent acquisitions, for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The cost of service and other revenues grew at a faster pace than our service and other revenues primarily due to additional investments in our service business to support new service solutions, the impact of lower 340B solutions revenues, and the mix of service revenues recognized in the quarter.
The overall decrease in gross margin primarily relates to additional investments in our business, including our service solutions, the impact of lower 340B solutions revenues, and the mix of service revenues recognized in the quarter, as well as inflationary impacts on inventory-related costs and higher employee-related and travel expenses. The decrease is partially offset by higher revenues for the three months ended September 30, 2022 due to increased customer demand as well as benefits associated with economies of scale due to higher volumes. Our gross profit for the three months ended September 30, 2022 was $159.1 million, as compared to $146.8 million for the three months ended September 30, 2021.
| Nine Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Cost of product revenues | $ | 374,175 | $ | 303,597 | $ | 70,578 | 23% | ||||||||||||||||
| As a percentage of related revenues | 53% | 52% | |||||||||||||||||||||
| Cost of services and other revenues | 156,864 | 112,027 | 44,837 | 40% | |||||||||||||||||||
| As a percentage of related revenues | 54% | 48% | |||||||||||||||||||||
| Total cost of revenues | $ | 531,039 | $ | 415,624 | $ | 115,415 | 28% | ||||||||||||||||
| As a percentage of total revenues | 53% | 51% | |||||||||||||||||||||
| Gross profit | $ | 467,234 | $ | 405,360 | $ | 61,874 | 15% | ||||||||||||||||
| Gross margin | 47% | 49% | |||||||||||||||||||||
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Cost of revenues for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021 increased by $115.4 million, of which $70.6 million was attributed to the increase in cost of product revenues and $44.8 million was attributed to the increase in cost of services and other revenues.
The increase in cost of product revenues was primarily driven by the increase in product revenues of $117.2 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was also driven by increased inventory-related costs due to inflationary impacts, as well as higher employee-related and travel expenses due to increased headcount. This increase was partially offset by the benefits associated with economies of scale due to higher volumes during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.
The increase in cost of services and other revenues was primarily driven by the increase in services and other revenues of $60.0 million, including incremental revenues from our recent acquisitions, for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The cost of service and other revenues grew at a faster pace than our service and other revenues primarily due to additional investments in our service business to support new service solutions, the impact of lower 340B solutions revenues, and the mix of service revenues recognized in the nine months ended September 30, 2022.
The overall decrease in gross margin primarily relates to additional investments in our business, including our service solutions, the impact of lower 340B solutions revenues, and the mix of service revenues recognized in the quarter, as well as inflationary impacts on inventory-related costs and higher employee-related and travel expenses. The decrease is partially offset by higher revenues for the nine months ended September 30, 2022 due to increased customer demand as well as benefits associated with economies of scale due to higher volumes. Our gross profit for the nine months ended September 30, 2022 was $467.2 million, as compared to $405.4 million for the nine months ended September 30, 2021.
Operating Expenses and Interest and Other Income (Expense), Net
| Three Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | $ | 25,171 | $ | 19,477 | $ | 5,694 | 29% | ||||||||||||||||
| As a percentage of total revenues | 7% | 7% | |||||||||||||||||||||
| Selling, general, and administrative | 115,459 | 97,910 | 17,549 | 18% | |||||||||||||||||||
| As a percentage of total revenues | 33% | 33% | |||||||||||||||||||||
| Total operating expenses | $ | 140,630 | $ | 117,387 | $ | 23,243 | 20% | ||||||||||||||||
| As a percentage of total revenues | 40% | 40% | |||||||||||||||||||||
| Interest and other income (expense), net | $ | (1,148) | $ | (6,065) | $ | 4,917 | (81)% | ||||||||||||||||
Research and Development. Research and development expenses increased by $5.7 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily attributed to an increase in employee-related expenses of approximately $4.0 million due to increased headcount to support the continued development of our intelligent infrastructure and incremental headcount from recent acquisitions.
Selling, General, and Administrative. Selling, general, and administrative expenses increased by $17.5 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021. The increase was primarily due to an increase of approximately $8.3 million in employee-related expenses primarily related to increased headcount, including the incremental headcount from recent acquisitions, as well as an increase of $1.1 million of employee-related expenses related to restructuring initiatives. The increase was also driven by an increase in shipping and handling costs of $2.5 million, an increase in intangible asset amortization expense of $2.0 million, an increase in spending on travel and meetings of $1.4 million, an increase in spending on software of $1.4 million, and increases in other operating expenses. The increase was partially offset by a decrease of $4.6 million in acquisition-related expenses.
Interest and Other Income (Expense), Net. Interest and other income (expense), net changed by $4.9 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, primarily driven by a $3.9 million decrease in other expenses and a $1.0 million increase in other income. The decrease in other expenses during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 is primarily due to the adoption
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of ASU 2020-06, effective January 1, 2022, which eliminated the imputed interest expense recognized on our convertible senior notes (refer to Note 1, Organization and Summary of Significant Accounting Policies, for additional information), partially offset by unfavorable foreign currency fluctuations during the three months ended September 30, 2022. The increase in other income during the three months ended September 30, 2022 as compared to the three months ended September 30, 2021 is primarily due to higher interest income received due to higher interest rates.
| Nine Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | $ | 76,556 | $ | 53,770 | $ | 22,786 | 42% | ||||||||||||||||
| As a percentage of total revenues | 8% | 7% | |||||||||||||||||||||
| Selling, general, and administrative | 354,644 | 273,672 | 80,972 | 30% | |||||||||||||||||||
| As a percentage of total revenues | 36% | 33% | |||||||||||||||||||||
| Total operating expenses | $ | 431,200 | $ | 327,442 | $ | 103,758 | 32% | ||||||||||||||||
| As a percentage of total revenues | 43% | 40% | |||||||||||||||||||||
| Interest and other income (expense), net | $ | (2,973) | $ | (18,715) | $ | 15,742 | (84)% | ||||||||||||||||
Research and Development. Research and development expenses increased by $22.8 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily attributed to an increase in employee-related expenses of approximately $17.4 million due to increased headcount to support the continued development of our intelligent infrastructure and incremental headcount from recent acquisitions, as well as an increase of $1.8 million in employee-related expenses for restructuring initiatives.
Selling, General, and Administrative. Selling, general, and administrative expenses increased by $81.0 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase was primarily due to an increase of approximately $41.9 million in employee-related expenses primarily related to increased headcount, including the incremental headcount from recent acquisitions, as well as an increase of $1.3 million in employee-related expenses for restructuring initiatives. The increase was also driven by an increase in spending on travel and meetings of $6.8 million, an increase in intangible asset amortization expense of $6.2 million, an increase in shipping and handling costs of $4.9 million, an increase in spending on software of $3.2 million, an increase in consulting expenses of $2.2 million, and increases in other operating expenses. In addition, we incurred impairment and abandonment charges to operating lease right-of-use assets of $5.4 million and ransomware-related expenses, net of insurance recoveries, of $1.9 million during the nine months ended September 30, 2022. The increase was partially offset by a decrease of $6.5 million in acquisition-related expenses.
Interest and Other Income (Expense), Net. Interest and other income (expense), net changed by $15.7 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021, primarily driven by a $13.4 million decrease in other expenses and a $2.3 million increase in other income. The decrease in other expenses during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 is primarily due to the adoption of ASU 2020-06, effective January 1, 2022, which eliminated the imputed interest expense recognized on our convertible senior notes (refer to Note 1, Organization and Summary of Significant Accounting Policies, for additional information). The increase in other income during the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021 is primarily attributable to benefits from certain arrangements outside of our normal course of business, as well as higher interest income received due to higher interest rates.
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Provision for (Benefit from) Income Taxes
| Three Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | 543 | $ | (5,990) | $ | 6,533 | (109)% | ||||||||||||||||
| Nine Months Ended September 30, | |||||||||||||||||||||||
| Change in | |||||||||||||||||||||||
| 2022 | 2021 | $ | % | ||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | (995) | $ | (4,665) | $ | 3,670 | (79)% | ||||||||||||||||
Our annual effective tax rate before discrete items was 17.8% and 28.2% for the nine months ended September 30, 2022 and 2021, respectively. The decrease in the estimated annual effective tax rate for the nine months ended September 30, 2022 compared to the same period in 2021 was primarily due to a decrease in non-deductible expenses, and an increase in research and development credits and FDII benefit.
Benefit from income taxes for the nine months ended September 30, 2022 included net discrete income tax benefit of $6.9 million, primarily due to a $6.2 million tax benefit from equity compensation.
Benefit from income taxes for the nine months ended September 30, 2021 included net discrete income tax benefit of $21.4 million, primarily due to a $14.5 million tax benefit from equity compensation.
Effective January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the ability to deduct research and development expenditures and required those expenditures to be amortized. While this change has not materially impacted our effective tax rate, the provision may impact our cash flows and increase the amount of cash taxes we pay.
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 $266.4 million at September 30, 2022 compared to $349.1 million at December 31, 2021. All of our cash and cash equivalents are invested in bank accounts and money market funds held in sweep and asset management accounts with major financial institutions.
Our cash position and working capital at September 30, 2022 and December 31, 2021 were as follows:
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In thousands) | |||||||||||
| Cash and cash equivalents | $ | 266,402 | $ | 349,051 | |||||||
Working capital (deficit) (1) | $ | 472,451 | $ | (95,456) | |||||||
_________________________________________________
(1) The working capital deficit balance as of December 31, 2021 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 2.3:1 and 0.9:1 at September 30, 2022 and December 31, 2021, respectively.
Sources of Cash
Revolving Credit Facility
On November 15, 2019, we entered into an Amended and Restated Credit Agreement (as subsequently amended, as discussed below, the “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
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administrative agent. The A&R Credit Agreement superseded our 2016 senior secured credit facility and provides for (a) a five-year revolving credit facility of $500.0 million (the “Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to $250.0 million. In addition, the 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.
On September 22, 2020, the parties entered into an amendment to the A&R Credit Agreement to, among other changes, permit the issuance of the convertible senior notes and the purchase of the convertible note hedge transactions described below, expand our flexibility to repurchase our common stock and make other restricted payments, and replace the total net leverage covenant with a new secured net leverage covenant that required us to maintain a consolidated secured net leverage ratio not to exceed 3.50:1 for the calendar quarters ending September 30, 2020, December 31, 2020, and March 31, 2021 and requires us to maintain a consolidated secured net leverage ratio not to exceed 3.00:1 for the calendar quarters ending thereafter.
As of September 30, 2022, there was no outstanding balance for the Revolving Credit Facility and we were in 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 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.
The 2016 Repurchase Program has a total of $2.7 million remaining for future repurchases as of September 30, 2022, which may result in additional use of cash. During the first quarter of 2022, the 2014 Repurchase Program was completed. During the nine months ended September 30, 2022, we repurchased approximately 389,300 shares of our common stock under our repurchase programs at an average price of $134.11 per share for an aggregate purchase price of approximately $52.2 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.
Based on our current business plan and product 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 Revolving Credit Facility will be sufficient to meet our cash needs for working capital, capital expenditures, potential acquisitions, 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 continued 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, | |||||||||||
| 2022 | 2021 | ||||||||||
| (In thousands) | |||||||||||
| Net cash provided by (used in): | |||||||||||
| Operating activities | $ | (4,372) | $ | 172,177 | |||||||
| Investing activities | (41,417) | (220,113) | |||||||||
| Financing activities | (24,515) | 40,697 | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,425) | (492) | |||||||||
| Net decrease in cash, cash equivalents, and restricted cash | $ | (71,729) | $ | (7,731) | |||||||
Operating Activities
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.
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Net cash used in operating activities was $4.4 million for the nine months ended September 30, 2022, primarily consisting of net income of $34.1 million adjusted for non-cash items of $117.1 million, offset by changes in assets and liabilities of $155.6 million. The non-cash items primarily consisted of depreciation and amortization expense of $64.8 million, share-based compensation expense of $50.7 million, amortization of operating lease right-of-use assets of $9.7 million, impairment and abandonment of operating lease right-of-use assets of $5.4 million, amortization of debt issuance costs of $3.1 million, and a change in deferred income taxes of $17.1 million. Changes in assets and liabilities include cash outflows from (i) an increase in accounts receivable and unbilled receivables of $116.9 million primarily due to an increase in billings driven by overall business growth and the timing of shipments and collections, (ii) an increase in inventories of $32.3 million primarily to support forecasted sales, including advanced purchases of certain components, such as semiconductors, as well as higher costs of inventory and timing of shipments, (iii) a decrease in accrued compensation of $27.9 million primarily due to a decrease in accrued commissions and bonuses, as well as timing of payroll and ESPP purchases, (iv) an increase in investment in sales-type leases of $17.3 million primarily due to the increase in sales-type lease revenues associated with certain Advanced Services products, (v) a decrease in operating lease liabilities of $11.0 million, and (vi) an increase in prepaid expenses of $2.6 million. These cash outflows were partially offset by (i) an increase in deferred revenues of $17.7 million primarily due to an increase in billings driven by the timing of shipments in order to meet customers' implementation schedules and recognition of revenues for products requiring installation, (ii) an increase in accrued liabilities of $11.7 million primarily due to an increase in taxes payable, (iii) a decrease in prepaid commissions of $8.8 million, (iv) a decrease in other current assets, net of funds held for customers, of $6.7 million primarily due to a decrease in prepaid income taxes, (v) a decrease in other long-term assets of $4.2 million, (vi) an increase in accounts payable of $2.0 million, and (vii) an increase in other long-term liabilities of $1.4 million.
Net cash provided by operating activities was $172.2 million for the nine months ended September 30, 2021, primarily consisting of net income of $63.9 million adjusted for non-cash items of $119.2 million, offset by changes in assets and liabilities of $10.9 million. The non-cash items primarily consisted of depreciation and amortization expense of $53.1 million, share-based compensation expense of $38.5 million, amortization of discount on convertible senior notes of $13.9 million, amortization of operating lease right-of-use assets of $8.8 million, amortization of debt issuance costs of $2.6 million, and a change in deferred income taxes of $2.0 million. Changes in assets and liabilities include cash outflows from (i) an increase in accounts receivable and unbilled receivables of $39.6 million primarily due to an increase in billings driven by overall business growth and the timing of shipments as well as collections, (ii) a decrease in accrued compensation of $12.0 million primarily due to a decrease in accrued commissions and bonuses, (iii) an increase in inventories of $10.1 million to support forecasted sales, including advanced purchases of certain components, and as well as higher costs of inventory, (iv) a decrease in operating lease liabilities of $9.4 million, (v) a decrease in other long-term liabilities of $9.2 million primarily due to a $6.2 million release of a certain net unrecognized tax benefit as a result of effective settlement with the tax authorities, (vi) an increase in prepaid expenses of $8.2 million primarily as a result of timing of certain insurance policies and other subscription obligations, (vii) an increase in other current assets of $1.1 million, and (viii) an increase in prepaid commissions of $1.0 million. These cash outflows were partially offset by (i) an increase in accounts payable of $33.1 million primarily due to an overall increase in spending, as well as timing of payments, (ii) an increase in deferred revenues of $21.2 million primarily due to an increase in billings driven by the timing of shipments in order to meet customers’ implementation schedules and recognition of revenues for products requiring installation, (iii) an increase in accrued liabilities of $20.1 million primarily due to an increase in rebates and lease buyout liabilities, (iv) a decrease in investment in sales-type leases of $2.7 million, and (vi) a decrease in other long-term assets of $2.6 million.
Investing Activities
Net cash used in investing activities was $41.4 million for the nine months ended September 30, 2022, which consisted of $3.4 million consideration paid for the acquisition of Hub and Spoke Innovations, net of cash acquired, capital expenditures of $33.9 million for property and equipment, and $9.6 million for costs of software development for external use, partially offset by purchase price adjustments from business acquisitions of $5.5 million.
Net cash used in investing activities was $220.1 million for the nine months ended September 30, 2021, which consisted of $178.1 million consideration paid for the acquisition of FDS Amplicare, net of cash acquired, capital expenditures of $17.9 million for property and equipment, and $24.1 million for costs of software development for external use.
Financing Activities
Net cash used in financing activities was $24.5 million for the nine months ended September 30, 2022, primarily due to $52.2 million for repurchases of our stock, and $11.4 million in employees’ taxes paid related to restricted stock unit vesting, partially offset by $39.5 million in proceeds from employee stock option exercises and ESPP purchases.
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Net cash provided by financing activities was $40.7 million for the nine months ended September 30, 2021, primarily due to $53.9 million in proceeds from employee stock option exercises and ESPP purchases, partially offset by $10.2 million in employees’ taxes paid related to restricted stock unit vesting, and a net decrease in the customer funds balances of $3.1 million.
Contractual Obligations
There have been no significant changes during the nine months ended September 30, 2022 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, 2021.
Contractual obligations as of September 30, 2022 were as follows:
| Payments Due By Period | |||||||||||||||||||||||||||||
| Total | Remainder of 2022 | 2023 - 2024 | 2025 - 2026 | 2027 and thereafter | |||||||||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||||||
Operating leases (1) | $ | 60,688 | $ | 3,279 | $ | 25,130 | $ | 17,973 | $ | 14,306 | |||||||||||||||||||
Purchase obligations (2) | 186,949 | 115,913 | 70,777 | 230 | 29 | ||||||||||||||||||||||||
Convertible senior notes (3) | 579,313 | — | 2,875 | 576,438 | — | ||||||||||||||||||||||||
Other (4) | 750 | 62 | 440 | 248 | — | ||||||||||||||||||||||||
Total (5) | $ | 827,700 | $ | 119,254 | $ | 99,222 | $ | 594,889 | $ | 14,335 | |||||||||||||||||||
_________________________________________________
(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)Other commitments include various finance leases and other financing arrangements.
(5)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 may 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, 2022, 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, 2022, there was no outstanding balance under the A&R Credit Agreement, and the net carrying amount under our convertible senior notes was $565.8 million. 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, 2022, the fair market value of our convertible senior notes was $610.1 million. Refer
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to Note 5, 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. Our interest rate swaps, which were designated as cash flow hedges, involved the receipt of variable amounts from counterparties in exchange for us making fixed-rate payments over the life of the agreements. We do not hold or issue any derivative financial instruments for speculative trading purposes. As of September 30, 2022, 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, 2022 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, 2021, filed with the SEC on February 25, 2022.
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 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 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, 2022.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The information set forth under “Legal Proceedings” in Note 13, Commitments and Contingencies, of the Notes accompanying the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q is incorporated herein by reference.
ITEM 1A. RISK FACTORS
Other than the updates provided below, please refer to Part I - Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the U.S. Securities and Exchange Commission (“SEC”) on February 25, 2022, for a description of the risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operations.
In assessing these risks, you should also refer to other information contained in 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 our Condensed Consolidated Financial Statements and accompanying Notes included in this report.
Risk Factors Related to our Business and Industry
Unfavorable economic and market conditions and a decreased demand in the capital equipment market could adversely affect our operating results.
Customer demand for our products is significantly linked to the strength of the economy. If decreases in demand for capital equipment caused by weak economic conditions and decreased corporate and government spending, any effects of fiscal budget balancing at the federal level or proposed legislative changes, deferrals or delays (including due to customer labor shortages) of capital equipment projects, longer timeframes for capital equipment purchasing decisions, or generally reduced expenditures for capital solutions occur, we will experience decreased revenues and lower revenue growth rates, and our operating results could be materially and adversely affected. Furthermore, the broader U.S. and global economy has experienced higher than expected inflationary pressures related to continued supply chain disruptions, labor shortages and geopolitical instability. We are unable to predict future changes in the state of the U.S. or global economy or whether inflationary pressures will continue to intensify or subside. If the current inflationary trends continue or fail to improve it could adversely affect our profits, margins or results of operations as a result of increasing costs.
We are subject to laws, regulations, and other legal obligations related to privacy, data protection, and information security, and the costs of compliance with, and potential liability associated with, our actual or perceived failure to comply with such obligations could harm our business.
We receive, store, and process personal information and other data from and about customers, in addition to our employees and services providers. In addition, our customers use our solutions to obtain and store personal information, including personal health information. For example, our customers use our EnlivenHealth Patient Engagement platform to guide and track patient notes, interventions, and appointments, which involves the collection of personal health information of patients. Our handling of data is subject to a variety of laws and regulations by federal, state, local, and foreign agencies, as well as contractual obligations and industry standards. Regulatory focus on data privacy and security concerns continues to increase globally, and laws and regulations concerning the collection, use, and disclosure of personal information are expanding and becoming more complex. In the United States, these include federal health information privacy laws (such as the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), discussed below), security breach notification laws, and consumer protection laws, as well as state laws addressing privacy and data security (such as the California Consumer Privacy Act of 2018 (“CCPA”) and the California Privacy Rights Act of 2020 (“CPRA”)).
While HIPAA does not create a private right of action, its standards have been used as the basis for civil suits and HIPAA is enforced by the Department of Health and Human Services Office for Civil Rights (“OCR”), which can bring actions against entities for noncompliance, including for failures to implement security measures sufficient to reduce risks to electronic protected health information or to conduct an accurate and thorough risk analysis, among other violations. HIPAA enforcement actions may lead to monetary penalties and costly and burdensome corrective action plans. We are also required to report known breaches of protected health information consistent with applicable breach reporting requirements set forth in applicable laws and regulations. Finally, on December 10, 2020, OCR issued proposed revisions to the Privacy Rule aimed at reducing regulatory burdens that may exist in discouraging coordination of care and patient access to their health information, among other changes. While a final rule has not yet been issued, if adopted, these proposed changes may require us to update our HIPAA policies and procedures to comply with the new requirements. The CCPA provides for civil penalties for violations, as well as a private right of action for data breaches which is expected to increase data breach litigation. Additionally, the CPRA,
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which goes into effect in January 2023, and imposes additional data protection obligations on companies doing business in California, created a new California data protection agency authorized to issue substantive regulations and could result in increased privacy and information security enforcement. Additional compliance investment and potential business process changes may be required. Laws similar to those in California have passed in Virginia and Colorado, and have been proposed in other states and at the federal level that may ultimately have conflicting requirements that would further complicate compliance. Furthermore, new health information standards, whether implemented pursuant to HIPAA, the HITECH Act, congressional action or otherwise could have a significant effect on the manner in which we handle health-related information, and the cost of complying with these standards could be significant. If we do not comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.
Internationally, various foreign jurisdictions in which we operate have established, or are developing, their own data privacy and security legal frameworks with which we or our customers must comply. In certain cases, these international laws and regulations are more restrictive than many regulations in the United States. For example, within the European Union, the General Data Protection Regulation (“EU GDPR”) grants individuals various data protection rights (e.g., the right to erasure of personal data) and imposes stringent data protection requirements on U.S.-based companies, such as ours, which fall within its scope, including inter alia: (i) accountability and transparency requirements; (ii) obligations to consider data protection as any new products or services are developed and to limit the amount of personal data processed; and (iii) obligations to report certain personal data breaches to the supervisory authority without undue delay (and no later than 72 hours where feasible). In addition, the EU GDPR prohibits the transfer of personal data from the EEA to the United States and other jurisdictions that the European Commission does not recognize as having “adequate” data protection laws unless a data transfer mechanism has been put in place. In July 2020, the Court of Justice of the European Union limited how organizations could lawfully transfer personal data from the EEA to the United States by invalidating the EU-US Privacy Shield for purposes of international transfers and imposed further restrictions on use of standard contractual clauses (“SCCs”) (i.e., an EU-style data transfer agreement), including a requirement for companies to carry out a transfer privacy impact assessment, which among other things, assesses laws governing access to personal data in the recipient country and considers whether supplementary measures that provide privacy protections additional to those provided under SCCs will need to be implemented to ensure an essentially equivalent level of data protection to that afforded in the EEA. Moreover, new versions of the SCCs (new “EU SCCs”) have recently been published requiring additional compliance and implementation efforts.
Administrative fines for non-compliance with the EU GDPR can be significant and can amount to fines of up to the greater of €20.0 million or 4% of global annual revenues. The EU GDPR also confers a private right of action on data subjects and consumer associations to lodge complaints with supervisory authorities, seek judicial remedies and obtain compensation for damages resulting from violations of the EU GDPR.
Relatedly, following the United Kingdom’s withdrawal from the EU (i.e., “Brexit”), the EU GDPR has been implemented in the United Kingdom (as the “UK GDPR”). The UK GDPR site alongside the UK Data Protection Act 2018 which implements certain derogations in the EU GDPR into UK law. The requirements of the UK GDPR are (at this time) largely aligned with those under the EU GDPR and as such, may lead to similar compliance and operational costs with potential fines for non-compliance of up to £17.5 million or 4% of annual worldwide turnover. As a result, we are potentially exposed to two parallel data protection regimes, each of which authorizes fines and the potential for divergent enforcement actions. It should also be noted that the new EU SCCs do not automatically apply in the UK since Brexit, and the UK Government has not yet formally acknowledged the new EU SCCs, (i.e., as a valid data transfer mechanism under the UK GDPR). Indeed, on August 11, 2021, the UK Information Commissioner’s Office launched a public consultation on its draft international data transfer agreement and guidance. This included the publication of a draft UK addendum that can be used with the new EU SCCs – however, this is not (at this time) finalized and as such, for the time being transfers from the UK to a third country should continue to be made in reliance on the “old” SCCs.
In addition to government regulation, privacy advocates and industry groups may propose new and different self-regulatory standards that may legally or contractually apply to us, and other regulatory protections may lose their applicability to our business as regulations and legal proceedings continue to evolve globally. We also expect that there will continue to be new proposed laws, regulations, and industry standards relating to privacy, data protection, and information security, including in the United Kingdom (see above), where we have business operations. We cannot predict the scope of any such future laws, regulations, and standards that may be applicable to us, or how courts, agencies, or data protection authorities might interpret current ones. It is possible that these laws and other obligations may be interpreted and applied in a manner that is inconsistent with our existing data management practices or the functionality of our solutions.
Compliance with privacy, data protection, and information security laws, regulations, and other obligations is costly, and we may encounter difficulties, delays, or significant expenses in connection with our compliance, or because of our customers’ need to comply or our customers’ interpretation of their own legal requirements. As previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on August 4, 2022, in connection with the cybersecurity event we
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experienced on May 4, 2022, we provided breach notification to fewer than 350 individuals as required by applicable law. In addition, any future event that results in the failure or perceived failure by us to comply with laws, regulations, policies, legal or contractual obligations, industry standards, or regulatory guidance relating to privacy or data security could result in governmental investigations and enforcement actions, litigation, fines and penalties, exposure to indemnification obligations or other liabilities, and adverse publicity, all of which could have an adverse effect on our reputation, as well as our business, financial condition, and results of operations. For example, as discussed further in the section entitled “Legal Proceedings” in Note 13, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this annual report on Form 10-K, we are currently and have in the past been subject to certain class action lawsuits asserting, among other allegations, claims of violation of the Illinois Biometric Information Privacy Act.
Significant disruptions in our information technology systems, breaches of data security, or cyber-attacks on our systems or solutions, could adversely impact our business.
We rely on information technology (“IT”) systems to keep financial records and corporate records, communicate with staff and external parties, and operate other critical functions, including sales and manufacturing processes. As our business needs change, we may need to expand or update our IT systems. We also utilize third-party cloud services in connection with our operations, which also may need to be expanded or updated as our business needs change. Our IT systems and third-party cloud services are potentially vulnerable to disruption due to breakdown, malicious intrusion and computer viruses, public health crises such as the ongoing COVID-19 pandemic, other catastrophic events or environmental impact, as well as due to system upgrades and/or new system implementations. Our systems may also experience vulnerabilities from third-party or open source software code that may be incorporated into our own or our vendors’ systems. Any prolonged system disruption in our IT systems or third-party services could negatively impact the coordination of our sales, planning, and manufacturing activities, which could harm our business. In addition, in order to maximize our information technology efficiency, we have physically consolidated our primary corporate data and computer operations. This concentration, however, exposes us to a greater risk of disruption to our internal IT systems. Although we maintain offsite back-ups of our data, a disruption of operations at our facilities could materially disrupt our business if we are not capable of restoring function within an acceptable time frame.
Our IT systems and third-party cloud services are potentially vulnerable to cyber-attacks, including ransomware, or other data security incidents, by employees or others, which may expose sensitive data to unauthorized persons. On May 4, 2022, we determined that certain of our information technology systems were affected by ransomware impacting certain internal systems. Upon detecting the security event, the Company took immediate steps designed to contain the incident and implement its business continuity plans to restore and support continued operations. The Company has contained the incident and restored substantially all of its critical information technology systems. The Company does not believe the security event will have a material adverse effect on its business, results of operations, or financial condition.
In addition, future data security incidents could lead to the loss of trade secrets or other intellectual property, or to the public exposure of sensitive and confidential information of our employees, customers, suppliers, and others, any of which could have a material adverse effect on our business, financial condition, and results of operations. Moreover, the current and/or a future security breach or privacy violation that leads to disclosure or modification of, or prevents access to, patient information, including personally identifiable information or protected health information, could harm our reputation, result in litigation, compel us to comply with federal and/or state breach notification laws, subject us to mandatory corrective action, require us to verify the correctness of database contents, and otherwise subject us to liability under laws and regulations that protect personal data, resulting in increased costs or loss of revenues. For additional information, see the risk factor captioned “We are subject to laws, regulations, and other legal obligations related to privacy, data protection, and information security, and the costs of compliance with, and potential liability associated with, our actual or perceived failure to comply with such obligations could harm our business” above for additional information.
In addition, we sell certain solutions that receive, store, and process our customers’ data. For example, our Omnicell One solution combines a cloud-based predictive intelligence platform with expert services designed to monitor pharmacy operations and recommend opportunities to help improve efficiency, regulatory compliance, and patient outcomes. As another example, our EnlivenHealth Patient Engagement platform is a private cloud-based solution that supports improving patient adherence goals through a single web-based platform that hosts functionality to guide and track patient notes, interventions, and appointments. An effective attack on our solutions could disrupt the proper functioning of our solutions, allow unauthorized access to sensitive and confidential information of our customers (including protected health information), and disrupt our customers’ operations. In addition to the risks and impacts noted above, any of these events could cause our solutions to be perceived as having security vulnerabilities and reduce demand for our solutions, which could have a material adverse effect on our business, financial condition, and results of operations. These risks are likely to increase as we continue to grow our cloud-based offerings, including in support of the industry vision of the Autonomous Pharmacy, and as we receive, store, and process more of our customers’ data.
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While we have implemented a number of security measures designed to protect our systems and data, including firewalls, antivirus and malware detection tools, patches, log monitors, routine back-ups, system audits, routine password modifications, and disaster recovery procedures, and have designed certain security features into our solutions, we and our third party service providers regularly defend against and respond to data security incidents and such measures may not be adequate or implemented properly to prevent or fully address the adverse effect of such events. In some cases we may be unaware of an incident or its magnitude and effects as breaches and other inappropriate access can be difficult to detect, and any delay in identifying them may lead to increased harm. In addition, while we possess insurance that currently includes coverage for cyber-attacks, we have seen a trend where the amount of coverage being offered by insurance providers for such cyber-attacks is decreasing while the cost of obtaining such coverage is increasing. If this trend continues the insurance coverage we possess may not be adequate or the cost to obtain such coverage may become prohibitive.
We use third-party cloud providers in connection with certain of our cloud-based offerings or third-party providers to host our own data, in which case we rely on the processes, controls, and security such third parties have in place to protect the infrastructure. We also may acquire companies, products, services, and technologies and inherit such risks when we integrate these acquisitions within Omnicell.
Any failure to prevent such security breaches or privacy violations, or implement satisfactory remedial measures, could require us to expend significant resources to remediate any damage, disrupt our operations or the operations of our customers, damage our reputation, damage our relationships with our customers, or expose us to a risk of financial loss, litigation, regulatory penalties, contractual indemnification obligations, or other liability.
Government regulation of the healthcare industry could reduce demand for our products or services, or substantially increase the cost to produce our products or deliver our services.
The manufacture and sale of most of our current medication management solutions products and services are not directly regulated by the U.S. Food and Drug Administration (“FDA”) or the U.S. Drug Enforcement Administration (“DEA”), although such products and services are used by other persons (our customers) whose pharmacy, dispensing, and compounding activities may be subject to regulation by those agencies and by state boards of pharmacy. We have both Class I and Class II products classified as medical devices, which are subject to FDA regulation and require compliance with the FDA Quality System Regulation as well as medical device reporting, including a sterile disposable product that required FDA 510(k) review and clearance prior to market and distribution. Medical devices are also subject to various other regulatory requirements, including as applicable, premarket clearance or approval, clinical trial requirements, establishment registration and device listing, complaint handling, notification and repair, replace, refund, mandatory recalls, unique device identifier (UDI) requirements, reports of removals and corrections, post-marketing surveillance, and device tracking. Additional products and services may require us to observe U.S. Department of Health and Human Services (“HHS”) regulations for credentialing of providers (pharmacists) or be subject to DEA regulations concerning the management, storing, dispensing, and disposal of, and accounting for, controlled substances, and may be regulated in the future by the FDA, DEA, or other federal agencies due to future legislative and regulatory initiatives or reforms. In addition, certain provisions of the Federal Food, Drug and Cosmetic Act related to the handling, distribution and compounding of pharmaceuticals, govern all parts of the drug distribution chain, which our customers may be required to comply with and which may influence customer demand for our products. Direct regulation of our business and products by the FDA, DEA, or other federal agencies could substantially increase the cost to produce our products or deliver our services and increase the time required to bring those products and services to market, reduce the demand for our products and services, and reduce our revenues. In addition, our customers include healthcare providers and facilities subject to regulation by the DEA, pharmacies subject to regulation by the FDA and individual state boards of pharmacy and hospitals subject to accreditation by accrediting organizations approved by the CMS, such as the Joint Commission, and the rules, regulations, and standards of such regulators and accrediting organizations. Any failure of our customers to comply with the applicable rules, regulations, and standards could reduce demand for our products or services and harm our competitive position, results of operations, and financial condition. Given our customers, products, services, and industry relationships, we may also be subject to rules, regulations, standards, and enforcement imposed by HHS, the U.S. Department of Justice, the HHS Office of Inspector General, CMS, the Health Resources and Services Administration, and state attorney generals, among others. As such, from time to time, we may be subject to various state or federal governmental, inspections, reviews, audits and investigations to verify our compliance with governmental rules and regulations to the extent governing certain of our products and services. The costs to respond to or defend any such reviews, audits and investigations can be significant and are likely to increase in the current enforcement environment. These audits and investigations may result in other adverse consequences, particularly if the underlying conduct is found to be pervasive or systemic. These consequences may include, but are not limited to: (1) refunding or retroactively adjusting amounts that have been paid under the relevant government program or from other payers; (2) state or federal agencies imposing significant fines, penalties and other sanctions on us; (3) losing our right to participate in certain governmental programs; and (4) damaging our reputation in various markets, which could adversely affect our ability to attract customers and employees. If these were to occur, the consequences could have a material adverse effect on our business, financial position and results of operations.
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While we have implemented a Privacy and Use of Information Policy and adhere to established privacy principles, use of customer information guidelines, and related federal and state statutes, we cannot assure you that we will be in compliance with all international, federal and state healthcare information privacy and security laws that we are directly or indirectly subject to, including, without limitation, HIPAA. Under HIPAA, we are considered a “business associate” in relation to many of our customers that are covered entities, and, as such, most of these customers have required that we enter into written agreements governing the way we handle and safeguard certain patient health information we may encounter in providing our products and services, and may impose liability on us for failure to meet our contractual obligations. Furthermore, pursuant to changes in HIPAA under the American Recovery and Reinvestment Act of 2009, we are covered under HIPAA similar to other covered entities and, in some cases, subject to the same civil and criminal penalties as a covered entity. A number of states and countries have also enacted privacy and security statutes and regulations that, in some cases, are more stringent than HIPAA and may also apply directly to us. If our past or present operations are found to violate any of these laws, we may be subject to fines, penalties, and other sanctions.
In addition, we cannot predict the potential impact of future privacy standards and other federal, state, and international privacy and security laws that may be enacted at any time on our customers or on Omnicell. These laws could restrict the ability of Omnicell and/or our customers to obtain, use, or disseminate patient information, which could reduce the demand for our products or services or force us to redesign our products or services in order to meet regulatory requirements. For more information, you should also refer to the risk factor above captioned “We are subject to laws, regulations, and other legal obligations related to privacy, data protection, and information security, and the costs of compliance with, and potential liability associated with, our actual or perceived failure to comply with such obligations could harm our business”.
Changes to the 340B Program could negatively impact our 340B Program-related services.
Any changes to the 340B Drug Pricing Program, such as changes to the scope of, or requirements for participation in, the 340B Program, could negatively impact our 340B Program-related services. Current litigation brought by multiple manufacturers is challenging the Health Resources and Services Administration’s requirement to offer the 340B ceiling price on drugs dispensed at contract pharmacies. The decisions that have been issued to date have been narrowly tailored and appeals have been filed in some of the cases. While the litigation is ongoing, a number of manufacturers have restricted access to the 340B ceiling price for drugs dispensed at contract pharmacies. It is not yet clear how the litigation will resolve. If 340B ceiling prices are not required to be offered for drugs dispensed at contract pharmacies or the requirements for participation by 340B covered entities make participation in the program less beneficial, our 340B Program-related offerings may become less useful to 340B covered entities, and our 340B Program-related businesses could decline, which could materially adversely affect our business, financial condition, and results of operations. Furthermore, uncertainty around the 340B Program could lead to lower levels of participation by 340B covered entities, which could reduce demand for our 340B Program-related businesses and could adversely affect our business. In addition, Congress has considered legislative changes to the 340B Program. Any legislative changes to the 340B Program could also affect our 340B Program-related services.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During the three months ended September 30, 2022, we did not repurchase any shares of our common stock under our repurchase program. 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
None.
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ITEM 6. EXHIBITS
| Incorporated By Reference | ||||||||||||||||||||||||||
| Exhibit Number | Exhibit Description | Form | Exhibit | Filing Date | ||||||||||||||||||||||
| 3.1 | 8-K | 3.1 | 10/21/2022 | |||||||||||||||||||||||
| 10.1* | 10-Q | 10.2 | 8/9/2022 | |||||||||||||||||||||||
31.1+ | ||||||||||||||||||||||||||
31.2+ | ||||||||||||||||||||||||||
32.1+ | ||||||||||||||||||||||||||
101.INS+ | 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. | |||||||||||||||||||||||||
101.SCH+ | Inline XBRL Taxonomy Extension Schema Document | |||||||||||||||||||||||||
101.CAL+ | Inline XBRL Taxonomy Extension Calculation Linkbase Document | |||||||||||||||||||||||||
101.DEF+ | Inline XBRL Taxonomy Extension Definition Linkbase Document | |||||||||||||||||||||||||
101.LAB+ | Inline XBRL Taxonomy Extension Labels Linkbase Document | |||||||||||||||||||||||||
101.PRE+ | Inline XBRL Taxonomy Extension Presentation Linkbase Document | |||||||||||||||||||||||||
104+ | Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy extension information contained in Exhibits 101). | |||||||||||||||||||||||||
_________________________________________________
* Indicates a management contract, compensation plan, or arrangement.
+ Filed herewith.
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SIGNATURE
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 4, 2022 | By: | /s/ Peter J. Kuipers | |||||||||||
Peter J. Kuipers, Executive Vice President & Chief Financial Officer (principal financial officer and duly authorized officer) | ||||||||||||||
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