We have incurred substantial debt, which could impair our flexibility and access to capital and adversely affect our financial position.
In addition, on September 25, 2020, we issued $575.0 million aggregate principal amount of 0.25% Convertible Senior Notes due 2025 (the “Notes”), pursuant to an indenture, dated September 25, 2020 (the “Indenture”), between us and U.S. Bank National Association, and certain other lenders pursuantas trustee. We used a portion of the proceeds from the issuance of the Notes to whichrepay all outstanding borrowings under the revolving credit facility was increased from $200.0 million to $315.0 million, and certain other modifications were made, including amendments to certain negative covenants. The Credit Agreement also provides for a $200.0 million term loan facility. At December 31, 2018,at the loan balance of the term loan facility was $140.0 million, and there was no outstanding loan balance for the revolving credit facility.time.
Our debt may:
may limit our ability to borrow additional funds or use our existing cash flow for working capital, capital expenditures, acquisitions, or other general business purposes;
limit our flexibility to plan for, or react to, changes in our business and industry;
place us at a competitive disadvantage compared to our less leveraged competitors; and
increase our vulnerability to the impact of adverse economic and industry conditions.
Our ability to meetmake scheduled payments of the principal of, to pay interest on, or to refinance our debt service obligations will dependindebtedness, including the Notes, depends on our future performance, which will beis subject to economic, financial, business,competitive, and other factors affecting our operations, many of which are beyond our control. IfOur business may not continue to, and we do not havecannot provide assurance that our business will, generate cash flow from operations in the future sufficient funds to meetfund our cash requirements, service our debt service obligations,or make necessary capital expenditures. Our failure to generate sufficient cash flow to pay our debts could have a material adverse effect on our business. In addition, if we are unable to generate such cash flow, we may be required to refinanceadopt one or restructure all or part of our existing debt, sell assets, borrowmore alternatives, such as borrowing more money, selling assets, restructuring debt, or sell securities, noneobtaining additional equity capital on terms that may be onerous or highly dilutive. Any of which we can assure you that we wouldthese actions still may not be sufficient to allow us to service our debt obligations or may otherwise have an adverse effect on our business.
Our ability to refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or to do so on desirable terms, which could result in a timely manner, or at all.default on our debt obligations. In addition, as more fully described below in the risk factor titled “Covenantscaptioned “Covenants in our A&R Credit Agreement restrict our business and operations in many ways, and if we do not effectively manage our compliance with these covenants, our financial conditions and results of operations could be adversely affected” below,affected,” the A&R Credit Agreement includes customary restrictive covenants that impose operating and financial restrictions on us, including restrictionsus.
In addition, borrowings under the A&R Credit Agreement currently bear interest based on the London Interbank Offered Rate (“LIBOR”), however as of December 31, 2021, LIBOR has started being phased out, and LIBOR is expected to be entirely discontinued on June 30, 2023. The phasing out or discontinuance of LIBOR and other pressures may cause LIBOR to disappear entirely or to perform differently than in the past. In addition, the A&R Credit Agreement provide that upon the occurrence of certain triggering events relating to the end of LIBOR, we and the administrative agent will select a different benchmark rate to replace LIBOR. The consequences of these developments cannot be entirely predicted, but changes in, or the inability to agree on, an alternative rate or benchmark could result in an increase in the cost of borrowings under the A&R Credit Agreement and other financial contracts that we may enter into that are currently indexed to LIBOR.
The transition to selling more products which include a software as a service or solution as a service subscription presents a number of risks.
We currently offer our IV compounding robots, PakPlus-Rx service, and XR2 Automated Central Pharmacy System together with personnel to operate the equipment and expert services to optimize utilization through subscription agreements. We also offer Omnicell One, EnlivenHealth Patient Engagement, 340B, FDS Amplicare, and certain other products and solutions as a subscription and/or service. As we continue to execute on the industry vision of the Autonomous Pharmacy and grow subscription and cloud-based offerings, we may offer additional products and services on a subscription basis. The transition to selling more products and services on a subscription basis presents a number of risks. The shift requires an investment of technical, financial, compliance, and sales resources, and we cannot guarantee that we will recoup the costs of such investments, or that these investments will improve our long-term growth and results of operations. If adoption of subscription solutions takes place faster than anticipated, the shift to subscription revenues will change the timing of revenue recognition and we may experience a temporary reduction of revenues and revenue growth rate. In addition, our cash flows may be impacted by the timing of invoicing of our subscription solutions. If any of our subscription solutions do not substantially meet customer requirements, contracts may be modified, causing a decline in revenue. Customers may elect not to renew their subscriptions upon expiration, or they may attempt to renegotiate pricing or other contractual terms at or prior to renewal on
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terms that are less favorable to us. In addition, since revenues are generally recognized over the term of the subscription, any decrease in customer purchases of our subscription-based products and services will not be fully reflected in our operating results until future periods, which may result in inflated revenue growth rates that do not reflect such decreases initially. Similarly, any additional subscription sales would not be fully reflected in our operating results until future periods.
Delays in installations of our medication management solutions or our more complex medication packaging systems could harm our competitive position, results of operations, and financial condition.
The purchase of our medication management solutions or our more complex medication packaging systems is often part of a customer’s larger initiative to re-engineer its pharmacy and their distribution and materials management systems. The purchase of our systems often entails larger strategic purchases by customers that generally require more complex and stringent contractual requirements, involve a significant commitment of management attention and resources by prospective customers, and require the input and approval of many decision-makers. In addition, new product announcements can cause a delay in our customers’ decisions to purchase our products or convert pending orders for our older products to those of our newer products. For these and other reasons, the sales cycle associated with sales of our systems is often lengthy and subject to a number of delays over which we have little or no control. A delay in, or loss of, sales of these systems (including as a result of the impacts of public health crises such as the ongoing COVID-19 pandemic) could have an adverse effect upon our operating results and could harm our business.
In addition, and in part as a result of the complexities inherent in larger transactions, the time between the purchase and installation of our systems can generally range from two weeks to one year. Delays in installation can occur for reasons that are often outside of our control. We have also experienced fluctuations in our customer and transaction size mix, which makes our ability to take actions that could beforecast our product bookings more difficult. Because we recognize revenues for our medication management solutions and our more complex medication packaging systems only upon installation at a customer’s site, any delay in our best interests.installation (including as a result of the impacts of public health crises such as the ongoing COVID-19 pandemic) will also cause a delay in the recognition of the revenues for those systems.
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 OmnicellEnlivenHealth 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 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 HIPAA,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. For example, Thesecurity (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 was enactedcan 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 June 28, 2018, becomes effectiveDecember 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, which goes into effect in January 20202023, 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 processmay 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 California residents.the manner in which we handle health-related information, and the cost of
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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 frameworkframeworks with which we or our customers must comply. In certain cases, these international laws and regulations are more restrictive than thosemany 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., which recently became effective in May 2018,the right to erasure of personal data) and imposes more stringent data protection requirements on U.S.-based companies, such as ours, which receivefall within its scope, including inter alia: (i) accountability and transparency requirements; (ii) obligations to consider data protection as any new products or processservices are developed and to limit the amount of personal informationdata 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 EU residents,the EEA to the United States and establishes greater penalties for non-compliance. Violationsother 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 result in penaltiesbe significant and can amount to fines of up to the greater of €20.0 million or 4% of global annual revenues,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 also lead to damages claims bysimilar 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 controllersprotection 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 subjects. Such penalties aretransfer 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 addition to any civil litigation claims by data controllers, customers, and data subjects.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.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.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, and we cannot predict the impact of such potential, future, inconsistent interpretations.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. In addition, any 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 operation.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.
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If we experience a significant disruption in our information technology systems, breaches of data security, or cyber-attacks on our systems or solutions, our business could be adversely affected.
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. In addition,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.operations, which also may need to be expanded or updated as our business needs change. Our information technologyIT 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. If we wereimpact, as well as due to system upgrades and/or new system implementations. Our systems may also experience avulnerabilities 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 information technologyIT systems or third-party cloud
services it could negatively impact the coordination of our sales, planning, and manufacturing activities, which could adversely affectharm 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 information technologyIT systems. Although we maintain offsite back-ups of our data, ifa disruption of operations at our facilities were disrupted, it may cause a material disruption incould materially disrupt our business if we are not capable of restoring function onwithin an acceptable time frame.
Our information technologyIT systems and third-party cloud services are potentially vulnerable to cyber-attacks, including ransomware, or other data security breaches, whetherincidents, by employees or others, which may expose sensitive data to unauthorized persons. Such data security breachesincidents could lead to the loss of trade secrets or other intellectual property, or could lead 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, a 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 revenue.revenues. See, “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” for additional information.
In addition, we sell certain solutions that receive, store, and process our customers’ data. For example, our Performance CenterOmnicell 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. In addition,As another example, our OmnicellEnlivenHealth 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. AnyIn 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 ourthe industry vision of the Autonomous Pharmacy, vision, and as we receive, store, and process more of our customers’ data.
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.
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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 becauseliability.
We may fail to realize the potential benefits of lost or misappropriated information,acquired businesses, including sensitive patient data. In addition, these breachesthe 340B Link Business, FDS Amplicare, ReCept, and other inappropriate access can be difficult to detect,MarkeTouch Media, which could negatively affect our business, financial condition, and any delay in identifying them may lead to increased harm of the type described above.operating results.
December 2021, respectively. We cannot provide assurance that any acquisition or future transaction we complete will result in long-term benefits to us or our stockholders, or that we will be successfulable to effectively integrate or manage the acquired businesses, including the 340B Link Business, FDS Amplicare, ReCept or MarkeTouch Media.
These transactions may involve significant challenges, uncertainties, and risks, including:
•difficulties in marketing any new productscombining previously separate businesses into a single unit and the complexity of managing a more dispersed organization as sites are acquired;
•difficulties in right-sizing organizations and gaining synergies across acquired operations;
•complying with regulatory requirements, such as those of the U.S. Food and Drug Administration (the “FDA”), the U.S. Drug Enforcement Administration (the “DEA”), or servicesstate boards of pharmacy, that we introduce, that new products or services willwere not previously subject to;
•failure to understand and compete effectively in markets in which we have limited previous experience;
•substantial costs and diversion of management’s attention when evaluating and negotiating such transactions and then integrating an acquired business, including any unforeseen delays and expenditures that may result;
•discovery, after completion of the acquisition, of liabilities assumed in acquisitions that are broader in scope and magnitude or are more difficult to manage than originally assumed or identified;
•difficulties assimilating and retaining key personnel of an acquired business;
•failure to achieve anticipated benefits such as revenue enhancements and operational and cost efficiencies;
•difficulties in integrating newly-acquired products and solutions in our offerings, or inability or failure to expand product bookings and sales or effectively coordinate sales and marketing efforts of the combined company;
•inability to maintain business relationships with similar productscustomers and suppliers of newly-acquired companies due to post-acquisition disruption; and
•inability or services sold byfailure to successfully integrate financial reporting and information technology systems.
If we are not able to successfully integrate or manage the acquired businesses and their operations, or if there are delays in combining the businesses, the anticipated benefits of the acquisition may not be realized fully or at all or may take longer to realize than expected and our competitors,business, financial condition, and operating results may be negatively impacted.
If goodwill or other intangible assets that the
In connection with the accounting for the Aesynt and Ateb acquisitions in 2016, the InPharmics acquisition in 2017, the 340B Link Business acquisition in October 2020, the FDS Amplicare acquisition in September 2021 and the ReCept and MarkeTouch Media acquisitions, each in December 2021, respectively, we recorded a significant amount of goodwill and other products or services. For example, we recently announced our XR2 Automated Central Pharmacy System, IVX Workflow, and RDX Essential solutions, and we cannot guarantee that demand will meet our expectations.intangible assets. In addition, for our XT Series, as well as our VBM 200F automated pharmacy solution for multi-medication blister card packaging are relatively new to the market. Deploymentprior acquisitions of new products or services often requires interoperability with other Omnicell products or services as well as with healthcare facilities’ existing information management systems. If these products or services fail to satisfy these demanding technological objectives, our customers may be dissatisfied,MTS Medication Technologies, Inc. (“MTS”), Avantec Healthcare Limited, and we may be unable to generate future sales.
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The healthcare industry facesis subject to legislative and regulatory changes, to healthcare legislation and other healthcare reform, as well as financial constraints and consolidation, which could adversely affect the demand for our products and services.
The healthcare industry has faced, and will likely continue to face, significant financial constraints. U.S. government legislation such as the American Recovery and Reinvestment Act of 2009, the PPACA, the Budget Control Act of 2011, and other health reform legislation, or the repeal of all or a portion of any such legislationprogram rulemaking may cause customers to postpone purchases of our products due to reductions in federal healthcare program reimbursement rates and/or needed changes to their operations in order to meet the requirements of legislation.legislation or in anticipation of future rulemaking. For example, the Budget Control Act of 2011, among other things, resulted in reductions in payments to Medicare providers of 2% per fiscal year, which went into effect on April 1, 2013 and, due to subsequent legislative amendments to the statute, will remain in effect into 2031 unless additional Congressional action is taken, with the exception of a temporary suspension of the 2% cut in Medicare payments from May 1, 2020 through March 31, 2022 due to the COVID-19 pandemic. Additionally, the American Taxpayer Relief Act of 2012, among other things, reduced Centers for Medicare & Medicaid Services (“CMS”) payments to several types of providers, including hospitals, and increased the statute of limitations period for the government to recover Medicare overpayments to providers from three to five years. Our automation solutions often involve a significant financial commitment from our customers and, as a result, our ability to grow our business is largely dependent on our customers’ capital and operating budgets. To the extent current or proposed legislation promotesand program rules promote spending on other initiatives or healthcare providers’ spending declines or increases more slowly than we anticipate, demand for our products and services could decline.
In addition, certain healthcare legislation and regulations may be challenged from time to time, in an effort to modify or repeal that legislation or those regulations. For example, prior proposals forthe Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or collectively, the “ACA,” which was passed in March 2010 and substantially changed the way healthcare reform, such asis financed by both governmental and private insurers, has been subject to numerous judicial, legislative, and regulatory efforts to replace it or to alter its interpretation or implementation. Most recently, on June 17, 2021, the “Medicare for All” bill introducedU.S. Supreme Court dismissed the most recent judicial challenge to the ACA brought by Senator Bernie Sanders in September 2017, have includedseveral states without specifically ruling on the conceptconstitutionality of a “single-payer” government-funded healthcare system. Such a system could reduce our customers’ revenues, as Medicarethe law. It is unclear how this decision, and other publicefforts to challenge, repeal, replace, or otherwise modify, or alter the implementation or interpretation of the ACA will affect our business, financial condition and results of operations.
We cannot predict the success of the Company with respect to any such challenges or the effect that subsequent changes or new resulting legislation or regulations would have on our business or the healthcare industry in general. Any future actions or developments could adversely impact the healthcare industry, including with respect to the cost of prescription drugs, regulation of pharmacy services, the administration of the federal 340B Drug Pricing Program, changes to pharmacy reimbursement rates, areor the way we do business, which could have an adverse impact on average lower than commercial health plan reimbursement rates. While it is not likely that legislation creating such a single-payer system will pass Congress and be signed by the President in the near term, continued introduction of legislation promoting a single-payer system by several members of Congress could increase uncertainty for our customers and cause them to delay purchases of our products and services.business.
Government regulation of the healthcare industry could reduce demand for our products, or substantially increase the cost to produce our products.
The manufacture and sale of most of our current medication management solutions products are not directly regulated by the U.S. Food and Drug Administration (“FDA”),FDA or the Drug Enforcement Administration (“DEA”). Through our acquisitionDEA, although such products 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 Aesynt, wepharmacy. We have both Class I and
Class II 510(k) exemptproducts 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.reporting, including a sterile disposable product requiring FDA 510(k) review and clearance prior to market and distribution. Medical devices may also be 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 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 and increase the time required to bring those products to market, reduce the demand for our products, and reduce our revenues. In addition, our
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customers include healthcare providers and facilities that use our equipment and dispense controlled substances are subject to regulation by the DEA. TheDEA, 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 these providers and facilitiesour customers to comply with DEA requirements, including the Controlled Substances Actapplicable rules, regulations, and its implementing regulations,standards could reduce demand for our products and harm our competitive position, results of operations, and financial condition. Pharmacies are regulated by individual state boards of pharmacy that issue rules for pharmacy licensure in their respective jurisdictions. State boards of pharmacy do not license or approveFinally, given our medicationcustomers, products, and supply dispensing systems; however, pharmacies using our equipment areindustry relationships, we may also be subject to state board approval. The failurerules, regulations, standards, and enforcement imposed by the U.S. Department of such pharmacies to meet differing requirements from a significant numberHealth and Human Services (“HHS”), the U.S. Department of state boardsJustice, the HHS Office of pharmacy could decrease demand for our productsInspector General, CMS, and harm our competitive position, results of operations,the Health Resources and financial condition. Similarly, hospitals must be accredited by The Joint Commission in order to be eligible for Medicaid and Medicare funds. The Joint Commission does not approve or accredit medication and supply dispensing systems; however, disapproval of our customers’ medication and supply dispensing management methods, and their failure to meet The Joint Commission requirements could decrease demand for our products and harm our competitive position, results of operations, and financial condition.Services Administration, among others.
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, the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”). Among other things, this legislation required the Secretary of Health and Human Services to adopt national standards governing the conduct of certain electronic health information transactions and protecting the privacy and security of personally identifiable health information maintained or transmitted by “covered entities,” which include pharmacies and other healthcare providers with which we do business.
In addition, we cannot predict the potential impact of future HIPAAprivacy standards and other federal, state, and stateinternational 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 force us to redesign our products in order to meet regulatory requirements. For more information, you should also refer to 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.”
Any changes to the 340B Drug Pricing Program, such as changes to the scope of 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, our 340B Program-related offerings may become less useful to 340B covered entities and our 340B Program-related businesses could decline. 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. It is unclear how this litigation and any legislative changes would affect our business, financial condition and results of operations.
We must comply with anti-kickback, fraud and abuse, false claims, transparency, and other healthcare laws and regulations.
Our current and future operations are subject to various federal and state healthcare laws and regulations that affect our sales, marketing and other promotional activities by limiting the kinds of financial arrangements we experience delayscan enter into with respect to our products and services. They also impose additional administrative and compliance burdens on us. These laws include, but are not limited to, the healthcare fraud and abuse laws described in installationsthe section titled “Business – Government Regulation” above.
The scope and enforcement of each of these laws is uncertain and subject to rapid change in the current environment of healthcare reform, and it is possible that some of our medicationbusiness activities could be subject to challenge under one or more of such laws. Ensuring that our business arrangements with third parties comply with applicable healthcare laws, as well as responding to investigations by government authorities (which have increased in recent years as the healthcare industry has come under greater scrutiny) can be time and supply dispensing systemsresource consuming and can divert management’s attention from the business.
If our operations are found to be in violation of any of the laws described above or any other government regulations that apply to us, we may be subject to significant financial penalties and possible exclusion from participation in federal and state funded healthcare programs, and the curtailment or restricting of our more complex medication packaging systems, resulting in delays inoperations, as well as additional reporting obligations
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and oversight if we become subject to a corporate integrity agreement or other agreement to resolve allegations of non-compliance with these laws. This could harm our ability to recognize revenue,operate our competitive position, results of operations, and financial condition could be harmed.
Our international operations may subject us to additional risks that can adversely affect our operating results.
We currently have operations outside of the United States, including sales efforts centered in Canada, Europe, the Middle East, and the Asia-Pacific regions, and supply chain efforts in Asia. We intend to continue to expand our international operations, particularly in certain markets that we view as strategic, including the Middle East. Our international operations subject us to a variety of risks, including:
•our reliance on distributors for the sale and post-sale support of our automated dispensing systemsmedication management solutions outside the United States, Canada, the United Kingdom, France, and Canada;Germany;
•remaining uncertainty regarding the consequences of Brexit and the impact on markets, as well as the potential impact on: (i) our operations; (ii) our customers’ operations and capital planning; and (iii) the healthcare industry overall;
•the difficulty of managing an organization operating in various countries;
•reduced protection for intellectual property rights particularly in jurisdictions that have less developed intellectual property regimes;certain jurisdictions;
•the imposition of, or adverse changes in, foreign regulatory requirements;
•fluctuations in currency exchange rates and difficulties in repatriating funds from certain countries;
•additional investment, coordination, and lead-time necessary to successfully interface our automation solutions with the existing information systems of our customers or potential customers outside of the United States; and
•political unrest, terrorism, and theother potential for other hostilities in areas in which we have facilities or operations.operations; and
•epidemics, pandemics, or other major public health crises, such as the ongoing COVID-19 pandemic.
•If we are unable to anticipate and address these risks properly, our business or operating results will be harmed.
Covenants in our A&R Credit Agreement restrict our business and operations in many ways, and if we do not effectively manage our compliance with these covenants, our financial conditions and results of operations could be adversely affected.
The A&R Credit Agreement contains various customary covenants that require use to provide financial and other information reporting as well as notice upon certain events and limit or restrict our ability and/or our subsidiaries’ ability to, among other things:
things, incur or assume liens or additional debt or provide guarantees in respect of obligations orof other persons;
issue redeemable preferred stock;
pay dividends or distributions or redeem or repurchase capital stock;
prepay, redeem, or repurchase certain debt;
make loans, investments, acquisitions, (including acquisitions of exclusive licenses), and capital expenditures;
enter into agreements that restrict distributions from our subsidiaries;
sell assets and capital stock of our subsidiaries;
enter into certain transactions with affiliates; and
consolidate or merge with or into, or sell substantially all of our assets to, another person.
The A&R Credit Agreement also includes financial covenants requiring us (i) not to exceed a maximum consolidated totalsecured net leverage ratio of 3.50:1 through the end of 2018, 3.25:1 through the end of the second quarter of 2019, and 3.00:1 thereafter (subject to certain exceptions) and (ii) to maintain a minimum fixed chargeinterest coverage ratio of 1.50:3.00:1. Our ability to comply with these financial covenants may be affected by events beyond our control. Our failure to comply with any of the covenants under the A&R Credit Agreement could result in a default under the terms of the A&R Credit Agreement, which could permit the administrative agent or the lenders to declare all or part of any outstanding borrowings to be immediately due and payable or foreclose on our assets, or to refuse to permit additional borrowings under the revolving credit facility, which could restrict our operations, particularly our ability to respond to changes in our business or to take specified actions to take advantage of certain business opportunities that may be presented to us. In addition, if we are unable to repay those amounts, the administrative
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agent and the lenders under the A&R Credit Agreement could proceed against the collateral granted to them to secure that debt and foreclose on our assets, which would seriously harm our business.
Climate change, legal, regulatory or market measures to address climate change and related emphasis on environmental, social and corporate governance (“ESG”) matters by various stakeholders may negatively affect our business and results of operations.
Climate changes, such as extreme weather conditions and natural disasters or the occurrence of extreme weather conditions and natural disasters with increased frequency and severity, resulting from increased concentrations of greenhouse gases in the atmosphere, could present risks to our operations by decreasing the availability or increasing cost of materials needed for manufacturing, or increasing insurance and other operating costs. Natural disasters and extreme weather conditions, such as hurricanes, tornados, earthquakes, wildfires or flooding, may also pose physical risks to our facilities and disrupt the operation of our supply chain.
In addition, increased awareness and concern over climate change may result in new or additional regional and/or federal legal or regulatory requirements designed to reduce greenhouse gas emissions and/or mitigate the effects of climate change on the environment. Currently, there continues to be a lack of consistent climate legislation, which creates economic and regulatory uncertainty. If such laws or regulations are more stringent than current legal or regulatory obligations, we are unablemay experience disruption in, or an increase in the costs associated with sourcing, manufacturing and distribution of our products, which may adversely affect our business, results of operations or financial condition
Furthermore, regulators, customers, investors, and employees expectations for ESG matters have been rapidly evolving and increasing. The enhanced stakeholder focus on these issues requires continuous monitoring of various and evolving standards and the associated reporting requirements. A failure to adequately meet stakeholder expectations, combined with inconsistent standards by which to measure ESG performance, may result in the loss of business, diluted market valuation, an inability to attract customers or an inability to attract and retain top talent.
Our success is dependent on our ability to recruit and retain skilled and motivated personnel, our competitive position, results of operations, and financial condition could be harmed.personnel.
Our success is highly dependent upon the continuing contributions of our key management, sales, technical, and engineering staff. We believe that our future success will depend uponstaff, and on our ability to attract, train, and retain highly skilledhighly-skilled and motivated personnel. As more of our products are installed in increasingly complex environments, greater technical expertise will be required. As our installed base of customers increases, we will also facerequire additional resources to meet increased demands on our customer service and support personnel, requiring additional resourcespersonnel. Furthermore, as we execute on the industry vision of the Autonomous Pharmacy and grow and develop our cloud-based software as a service and solution as a service offerings, more specialized expertise will be required. This growth and shift in products and offerings could lead to meet these demands. We may experience difficulty in recruiting qualified personnel. Competitionincreased labor costs, and thereby increased costs of our products and offerings, which could result reduced customer demand and our operating results could be materially and adversely affected. Additionally, competition for qualifiedspecialized and technical engineering, managerial, sales, marketing, financial reporting, and other personnel can be intense, and wethe pool of suitable candidates may be limited. We may not be successful in attracting and retaining qualified personnel. If we lose the services of one or more of our key personnel we may not be able to find a suitable replacement and our business could be materially adversely affected. Furthermore, external and internal factors (such as our continued growth) and events related to the COVID-19 pandemic (including new variants of the virus) may result in greater workloads for our employees compared to those at companies with which we compete for personnel, which may lead to higher levels of employee burnout and turnover. Competitors have in the past attempted, and may in the future attempt, to recruit our employees.
In addition, we have historically used stock options, restricted stock units, and other forms ofsince equity compensation asis a key componentscomponent of our employee compensation program, in orderany failure to align employees’ interests with the interests of our stockholders, encourage employee retention, and provide competitive compensation packages. The effect of managing share-based compensation expense and minimizing shareholder dilution from the issuance of new shares may make it less favorable for us to grant stock options, restricted stock units or other forms of equity compensation, to employees in the future. In order to continue granting equity compensation at competitive levels, we must seekreceive stockholder approval for anyfuture proposed increases to the number of shares reserved for issuance under our equity incentive plans such as the share increase that was approved at our 2018 Annual Meeting of Stockholders, and we cannot assure you that we will receive such approvals in the future. Any failure to receive approval for future proposed increases could prevent us from granting equity compensation at competitive levels and make it more difficult to attract, retain, and motivate employees. Further, to the extent that we expand our business or product lines through the acquisitionemployees, including key employees of other businesses, any failure to receive any such approvals could prevent us from securing employment commitments from such newly acquired employees.businesses. Failure to attract and retain key personnel could harm our competitive position, results of operations, and financial condition.
Our failure to protect our intellectual property rights could negatively affect our ability to compete.
Our success depends in part on our ability to obtain patent protection for technology and processes, and our ability to preserve our trademarks, copyrights, and trade secrets. We have pursued patent protection in the United States and foreign jurisdictions for technology that we believe to be proprietary and for technology that we find offers us a potential competitive advantage for our products. We intend to continue to pursue such protection in the future. Our issued patents relate to various features of our medication management solutions and supply dispensing systems and ourmedication packaging systems. We cannot assure you that we will file any patent applications in the future and that any of our patent applications will result in issued patents, or that, if issued, such patents will provide significant protection for our technology and processes. As an example, in September 2014, an action was brought against us, to, among other matters, correct the inventorship of certain patents owned by us. Furthermore, we cannot assure you that others will not develop technologies that are similar or superior to our technology or that others will not design around the patents we own. All of our system software is copyrighted and subject to the protection of applicable copyright laws. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or obtain and use information that we regard as proprietary, which could harm our competitive position.
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If we are unable to maintain our relationships with group purchasing organizations (“GPOs”) or other similar organizations, we may have difficulty selling our products and services to customers represented by these organizations.
A number of group purchasing organizations, including HealthTrust Purchasing Group, Intalere (f.k.a. Amerinet, Inc.), Premier Inc., The Resource Group, Resource Optimization & Innovation, LLC, and Vizient Inc.,GPOs have negotiated standard contracts for our products on behalf of their member healthcare organizations. Members of these group purchasing organizationsGPOs may purchase under the terms of these contracts, which obligate us to pay the group purchasing organizationGPO a fee. We also have also contracteda Federal Supply Schedule contract with the United States General Services Administration,Department of Veterans Affairs, allowing the Department of VeteranVeterans Affairs, the Department of Defense, and other Federal Governmentgovernment customers to purchase our products. These contracts enable us to more readily sell our products and services more readily to customers represented by these organizations. Some of our contracts with these organizations are terminable at the convenience of either party. The loss of any of these relationships could impact the breadth of our customer base and could impair our ability to meet our revenue or revenue growth rate targets or our ability to increase our revenues. These organizations may not renew our contracts on similar terms, if at all, and they may choose to terminate our contracts before they expire, any of which could cause our revenues to decline.
If we are unable to meet the demands of, or maintain our relationships with, majorour institutional pharmacies, we may experience a decline in theand retail pharmacy customers, our revenue from sales of blister cardsmedication packages and other consumables as well as other services may decline.
Approximately 6% of our revenues during the year ended December 31, 2021 were generated from the sale of consumable medication packages, most of which are produced in our St. Petersburg, Florida facility on a continuous basis and are shipped out to fulfill the demands of our institutional and retail pharmacy customers domestically and abroad. The demands placed on institutional and retail pharmacies by their customers represent real time requirements of those customers. Our customer agreements for the sale of consumable medication packages are typically short-term in nature and typically do not impose volume commitments on the customer. If we are unable to supply quality packaging to our customers in a timely manner, they may use alternative methods of distributing medications to their customers, including consumable medication packaging sold by our competitors, and our revenues will decline. Any disruption in the production capabilities of our St. Petersburg facilities, including as a result of extreme weather conditions or natural disasters, will adversely affect our ability to these customers.ship our consumable medication packages globally and would reduce our revenues.
Similarly, EnlivenHealth offers a portfolio of web-based patient engagement, medication management, financial management and analytics tools to pharmacies, which is designed to support improvement in health outcomes related to medication use. The success of these services depends on the trust our customers place in us and our reputation and ability to provide high-quality service. If we are unable to successfully interface our automation solutions withmaintain the existing information systemssatisfaction or meet the expectations of our customers, they may chooseour reputation with current and potential customers could be harmed, which could have a material adverse effect on our business, financial condition and results of operations. In addition, if we fail to maintain our relationships with existing customers or are unable to create new relationships with other pharmacies, this could have an adverse effect on our business, financial condition, and results of operations.
Our inability to secure or maintain access to existing and future specialty drugs or pharmacy provider networks for our specialty pharmacy customers could have a material adverse effect on our business.
We provide specialty pharmacy management services to provider groups, federally qualified health centers, and health systems, including providing access to payor networks and limited distribution drugs (“LDD”). We have historically been able to obtain most of the payor and LDD products through our current network. However, if we are unable to obtain access to new LDDs or maintain access to current LDDs for our customers, it could have a material adverse effect on our business, profitability, and results of operations. In addition, if we are not able secure participation in networks of pharmacy providers for our customers at acceptable reimbursement rates or if we lose access to usecurrent pharmacy networks, this could result in loss of customers, which could adversely affect our productsoperating results. We endeavor to demonstrate continued value and services.
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Our products use raw materials and components that may be subject to useprice fluctuations, shortages, or interruptions of supply, and if we are unable to reduce their usemaintain supply sources for such raw materials and components, or if such sources fail to satisfy our supply requirements, in particular with regard to semiconductor chips, we may experience a loss of sales, increased component costs, and reduced profitability.
Factors that are largely beyond our automation solutions, which would harm our business. Also, these information systems are impacted by regulatory forces,control, such as the Promoting Interoperability Programcost, quality, and HIPAA Omnibus Rules,availability of the raw materials and components utilized in the manufacture of our products, may evolve their interoperability functionality accordingly. affect the cost of such products, and we may not be able to pass those costs on to our customers. Our products use raw materials and components that may be subject to price fluctuations, shortages, or other disruptions of supply for many reasons outside of our control, including as a result of the COVID-19 pandemic. In addition, we may be dependent upon a limited number of suppliers for certain components which may be unduly affected by supply chain disruptions. The cost, quality, and availability of these raw materials and components are essential to the successful manufacture and sale of our products. If we are unable to maintain supply sources of these raw materials and components, or if such sources fail to satisfy our supply requirements, we may lose sales and experience increased component costs.
We expecthave developed and implemented strategies in an effort to comply withmitigate the mandatory standards and certifications that enable us to continuously interoperate with partner information systems,impact of price fluctuations, shortages, or other disruptions of supply, but such symbiotic evolutionthese strategies, particularly in a changing regulatoryprolonged inflationary environment, can at times create an execution risk.
reputation, results of operations, and financial condition. We have also seen a period of sustained price increases for commodities used in the manufacture of our products that may continue as demand increases and supply remains constrained, which has resulted in, and may continue to result in, increased costs for Omnicell and thereby potentially lower profit margins. If the costs of these commodities increase or remain elevated, it could adversely affect Omnicell’s financial condition, operating results, and cash flow.
We depend on a limited number of suppliers for our products, and our business may suffer if we were required to change suppliers to obtain an adequate supply of components, equipment, and raw materials on a timely basis.
Although we generally use parts and components for our products with a high degree of modularity, certain components are presently available only from a single source or limited sources. We rely on a limited number of suppliers for the raw materials that are necessary in the production ofto produce our consumable medication packages. While we have generally been able to obtain adequate supplies of all components and raw materials in a timely manner from existing sources, or where necessary, from alternative sources, of supply, we entered into relationships with new suppliers in connection with the launch of our XT Series products. We engage multiple single source third-party manufacturers to build several of our sub-assemblies. The risks associated with changing to alternative vendors, if necessary, for any of the numerous components used to manufacture our products could limit our ability to manufacture our products or result in the use of substitute components in our products that could lead to additional complexity or cost in maintaining our products and thereby harm our business. Due to our reliance on a few single source partners to build our hardware sub-assemblies and on a limited number of suppliers for the raw materials that are necessary in the production of our consumable medication packages, a reduction or interruption in supply from our partners or suppliers, or a significant increase in the price of one or more components could have an adverse impact on our business, results of operations, and financial condition. In certain circumstances, the failure of any of our suppliers or us to perform adequately could result in quality control issues affecting end users’ acceptance of our products. These impactsproducts, which could damage customer relationships and could harm our business.
Our U.S. government lease agreements are subject to annual budget funding cycles and mandated unilateral changes, which may affect our ability to enter into such leases or to recognize revenues and sell receivables based on thesesuch leases.
Prior to September 2021, U.S. government customers that leaseleased our equipment typically signsigned contracts with five-year payment terms that are subject to one-year government budget funding cycles. Further,Effective September 2021, the government has in certain circumstances mandated unilateral changes in its Federal Supply Services contract that could renderhas resulted in our lease termsdetermination not to enter into future leases with theU.S. government less attractive. Incustomers. Our existing leases with U.S. government customers are unaffected by this change. As
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a result, our judgmentvolume of U.S. government customer leases will decline over time and based on our history with these accounts, we believe these receivables are collectible. However,cease in the future, thefuture. The failure of any of our U.S. government customers to receive their annual funding, or the government mandating changes to the Federal Supply Services contract, could impair our ability to sell lease equipment to these customers or to sell our U.S. government receivables to third-party leasing companies. In addition, the ability to collect payments on unsold receivables could be impaired and may result in a write-down of our unsold receivables from U.S. government customers. The balance of our unsold leases to U.S. government customers was $12.7$21.8 million as of December 31, 2018.2021.
If we fail to manage our inventory properly, our revenue, gross margin, and profitability could suffer.
Managing our inventory of components and finished products is a complex task. A number of factors, including, but not limited to, the need to maintain a significant inventory of certain components that are in short supply, especially in response to the current semiconductor chip shortage, or that must be purchased in bulk to obtain favorable pricing, the general unpredictability of demand for specific products and customer requests for quick delivery schedules, may result in us maintaining large amounts of inventory. Other factors, including changes in market demand, customer requirements, and technology, may cause our inventory to become obsolete. Any excess or obsolete inventory could result in inventory write-downs, which in turn could harm our business and results of operations.
Intellectual property claims against us could harm our competitive position, results of operations, and financial condition.
We expect that developers of medication and supply dispensing systemsmanagement solutions and medication packaging systems will be increasingly subject to infringement claims as the number of products and competitors in our industry grows and the functionality of products in different industry segments overlaps. In the future, third parties may claim that we have infringed upon, misappropriated, or otherwise violated their intellectual property rights with respect to current or future products. We do not carry special insurance that covers intellectual property infringement claims; however,claims, such claims may be covered under our traditional insurance policies. These policies contain terms, conditions, and exclusions that make recovery for intellectual property infringement claims difficult to guarantee. Any infringement claims, with or without merit, could be time-consuming to defend, result in costly litigation, divert management’s attention and resources, cause product shipment delays or require us to enter into royalty or licensing agreements. These royalty or licensing agreements, if required, may not be available on terms acceptable to us, or at all, which could harm our competitive position, results of operations, and financial condition.
Product liability claims against us could harm our competitive position, results of operations, and financial condition.
Our products provideinclude medication management solutions and supply chain management solutionsmedication adherence products and services for the healthcare industry.systems and pharmacies. Despite the presence of healthcare and pharmacy professionals as intermediaries between our products and patients, if our products fail to provide accurate and timely information or operate as designed, customers, patients, or their family members could assert claims against us for product liability. For example, as further discussed under “Legal Proceedings” in Note 10, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements included in this annual report, on January 10, 2018, a lawsuit was filed against a number of parties, including the Company and one of its subsidiaries, in the Circuit Court for the City of Richmond, Virginia, asserting, among other allegations, claims of product liability. Moreover, failure of health care facility and pharmacy employees to use our products for their intended purposes could result in product liability claims against us. Litigation with respect to product liability claims, regardless of any outcome, could result in substantial cost to us, divert management’s attention from operations, and decrease market acceptance of our products. We possess a variety of insurance policies that include coverage for general commercial liability and technology errors and omissions liability. We attempt to mitigate these risks through contractual terms negotiated with our customers. However, these policies and protective contractual terms may
not be adequate against product liability claims.claims and in the past we have been subject to certain lawsuits asserting, among other allegations, claims of product liability. A successful claim brought against us, or any claim or product recall that results in negative publicity about us, could harm our competitive position, results of operations, and financial condition. Also, in the event that any of our products is defective, we may be required to recall or redesign those products.products, which could result in increased costs and have an adverse impact on our results of operation.
We are dependent on technologies provided by third-party vendors, the loss of which could negatively and materially affect our ability to market, sell, or distribute our products.
Some of our products incorporate technologies owned by third parties that are licensed to us for use, modification, and distribution. For example, the VBM 200F is manufactured bywe entered into a third party and sold by us pursuantreseller agreement with Kit Check, Inc. to a distribution and supplier agreement.offer “Bluesight for Controlled Substances” diversion prevention software to our customers. If we lose access to third-party technologies, such as our ability to distribute the VBM 200F,Bluesight for Controlled Substances, or we lose the ongoing rights to modify and distribute these technologies with our products, we will have to devote resources to independently develop, maintain, and support the technologies ourselves, pay increased license costs, or transition to another vendor. Any independent development, maintenance, or support of these technologies by us or the transition to alternative technologies could be costly, time consuming, and could delay our product releases and upgrade schedules. These factors could negatively and materially affect our ability to market, sell, or distribute our products.
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Investment in connection with ournew business strategies and initiatives could disrupt ongoing business information system upgrades,and present risks not originally contemplated.
We have invested, and in the future may invest, in new business strategies or initiatives, including those requiredwith respect to transition acquired entities onto information systems already utilized,our software as a service or solution as a service subscription products and those implementedservices or other subscription and cloud-based offerings. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, lack of expertise to adopteffectively execute such strategies or initiatives, insufficient revenue to offset liabilities assumed and expenses associated with a strategy or initiative, inadequate return of capital, and unidentified issues not discovered in our due diligence. These new accounting standards,ventures may be inherently risky and may not be successful. Even if successful, they may not have the projected or actual impact that we initially expected. As a result, such initiatives may materially adversely affect our results of operations, financial condition and cash flows.operating results.
The market price of our common stock may continue to upgradebe highly volatile.
Our common stock traded between $115.78 and $187.29 per share during the year ended December 31, 2021. The market price of our enterprise-level business information system with new capabilitiescommon stock has been and transition acquired entities onto information systems already utilizedmay continue to be highly volatile in response to various factors, many of which are beyond our control, including:
•actual or anticipated changes in our operating results, and whether our operating results or forecasts meet the expectations of securities analysts or investors;
•changes in the company.ratings of our common stock by securities analysts or changes in their earnings estimates;
•developments in our customer relationships;
•announcements by us or our competitors of technological innovations or new products;
•mergers, acquisitions, combinations, and other significant transactions involving us or our competitors;
•level of demand for our common stock, and actions by stockholders or short sellers of our common stock;
•epidemics, pandemics, or other major public health crises, such as the ongoing COVID-19 pandemic; or
•general economic and market conditions.
Furthermore, the stock market in general, and the market for technology companies in particular, have experienced extreme price and volume fluctuations. These broad market fluctuations may cause the market price of our common stock to decline irrespective of our performance. In 2016, we replacedaddition, sales of substantial amounts of our common stock in the legacy Enterprise Requirements Planning systems usedpublic market, or the perception that such sales could occur, could lower the market price of our common stock.
In addition, stockholders have initiated class action lawsuits against companies following periods of volatility in Mach4 with systems currentlythe market prices of these companies’ stock. For example, in use in other parts ofJuly 2019, a putative class action lawsuit was filed against Omnicell and we intend to do the same at Aesynt and Ateb. Based upon the complexity of some of the upgrades, there is risk that we will not see the expected benefit from the implementation of these upgrades in accordance with their anticipated timeline and will incur costs in addition to those we have already planned for. In addition, in future years, we will need to comply with new accounting standards established by the Financial Accounting Standards Board (“FASB”) for leases and other componentscertain of our financial reporting. These new standards will require usofficers alleging that the defendants violated federal securities laws by making certain materially false and misleading statements. While this action was concluded in December 2019 following the lead plaintiff's voluntary dismissal as to modifyall defendants, we may in the future be subject to other class action lawsuits, especially following periods of volatility in our accounting policiesstock price.
Our quarterly and financial reporting disclosure. We further anticipate that integration of theseannual operating results may fluctuate, which makes our future operating results difficult to predict, and possibly other new standards may require a substantial amount of management’s time and attention, and require integration with our enterprise resource planning system. The implementation of the system and the adoption of future new standards, in isolation as well as together, could result in operating inefficiencies and financial reporting delays, and could impact our ability to timely record certain business transactions. All of these potential results could adversely impact our results of operations, financial condition, and cash flows.
•the size, product mix, and retention vehicle. We had options outstandingtiming of orders for our products, and their installation and integration and whether our estimates for the same were proper;
•our ability to purchase approximately 3.7 million sharessuccessfully install our products on a timely basis and meet other contractual obligations necessary to recognize revenue;
•fluctuations in customer demand for our products, including due to changes in our customers’ budgets, and whether customer demand was properly estimated;
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•our common stock, atability to control costs, including operating expenses, and continue cost reduction efforts;
•changes in pricing policies by us or our competitors;
•the number, timing, and significance of product enhancements and new product announcements by us or our competitors;
•the timing and significance of any acquisition or business development transactions that we may consider or negotiate and the revenues, costs, and earnings that may be associated with these transactions;
•the relative proportions of revenues we derive from products and services;
•our ability to generate cash from our accounts receivable on a weighted-average exercise pricetimely basis;
•changes in, and our ability to successfully execute on, our business strategy; and
•macroeconomic and political conditions, including fluctuations in interest rates, tax increases, availability of $41.27 per share as of December 31, 2018. If some orcredit markets, and trade and tariff actions.
Due to all of these sharesfactors, our quarterly or annual revenues and operating results are sold intodifficult to predict and may fluctuate, which in turn may cause the public market over a short time period, the price of our common stock may decline, as the market may not be able to absorb those shares at the prevailing market prices. Such sales may also make it more difficult for us to sell equity securities in the future on terms that we deem acceptable.decline.
Raising additional capital may cause dilution to our existing stockholders, restrict our operations or harm our business, financial condition, and results of operations.
We may seek additional capital through a variety of means, including through private and public equity offerings and debt financings. To the extent that we raise additional capital through the sale of equity or convertible debt securities, the ownership interest will be diluted, and the terms may include liquidation or other preferences that adversely affect the rights of our stockholders. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures, entering into licensing arrangements, or declaring dividends. If we raise additional funds from third parties, we may have to relinquish valuable rights to our technologies, or grant licenses on terms that are not favorable to us.
If we are unable to raise additional funds through equity or debt financing when needed, our ability to market, sell, or distribute our products and/or fund our operations may be negatively impacted and could harm our business, financial condition, and results of operations.
Certain provisions in our charter documents and under Delaware law may discourage, delay, or prevent an acquisition of us and limit our stockholders’ ability to obtain a favorable judicial forum for certain disputes.
Certain anti-takeover provisions of Delaware law and our charter documents may make a change in control of our Company more difficult, even if a change in control would be beneficial to the stockholders. Our certificate of incorporation provides that stockholders’ meetings may only be called by our Board of Directors. Our bylaws provide that stockholders may not take action by written consent, and require that stockholders comply with advance notice procedures to nominate director candidates for election or to propose matters to be acted upon at a meeting of our stockholders. Delaware law also prohibits corporations from engaging in a business combination with any holders of 15% or more of their capital stock until the holder has held the stock for three years unless, among other possibilities, our Board of Directors approves the transaction. Our Board of Directors may use these provisions to prevent changes in the management and control of our Company. Also, under applicable Delaware law, our Board of Directors may adopt additional anti-takeover measures in the future including, without limitation, a stockholder rights plan.
In addition, our bylaws also establish the Delaware Court of Chancery as the exclusive forum for certain legal actions, including certain stockholder disputes, and establish the federal district courts of the United States of America as the exclusive forum for any action asserting a cause of action arising under the Securities Act of 1933, as amended, which exclusive forum provisions may limit the ability of our stockholders to bring a claim in a judicial forum that such stockholders find favorable for disputes with us or our directors, officers, or other employees.
Risk Factors Related to Our Notes
Conversion of the Notes may dilute the ownership interest of our stockholders, depress the price of our common stock or, if the conditional conversion feature of the Notes is triggered, adversely affect our financial condition and operating results.
The Notes are convertible at the option of the holders on or after May 15, 2025 and, in certain circumstances, prior to May 15, 2025. The initial conversion rate for the Notes is 10.2751 shares of our common stock per $1,000 principal amount of
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Notes, subject to adjustment under certain circumstances in accordance with the terms of the Indenture. On December 13, 2021, we made an irrevocable election under the Indenture to require the principal portion of our Notes to be settled in cash (up to $1,000 in cash per $1,000 principal amount of Notes) and any conversion consideration in excess of $1,000, in cash and/or shares of our common stock, at our option, upon conversion. The conversion of some or all of the Notes may dilute the ownership interests of our stockholders. As we have the option to settle the excess of the principal amount in shares of our common stock, any sales in the public market of our common stock issuable upon such conversion could adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes may encourage short selling of our common stock by market participants because the conversion of the Notes could be used to satisfy short positions, or the anticipated conversion of the Notes into shares of our common stock could depress the price of our common stock.
Following our irrevocable election, only the shares of common stock expected to be settled in excess of the principal amount are considered dilutive for calculating earnings per share under the if-converted method. Accordingly, as the price of our common stock increases, our diluted earnings per share could be adversely affected.
Prior to May 15, 2025, if a circumstance that permits early conversion occurs, holders of the Notes will be entitled to convert their Notes at any time during specified periods at their option. For example, the Notes are currently convertible until March 31, 2022 because our common stock traded above a minimum price specified in our Indenture during the quarter ended December 31, 2021, and may be convertible in the future. If one or more holders elect to convert their Notes, we will be required to settle at least the principal amount of our conversion obligation through the payment of cash (up to $1,000 in cash per $1,000 principal amount of Notes), which could adversely affect our liquidity. In addition, as a result of the irrevocable election, in periods when the conditional conversion feature of the Notes is triggered, we must reclassify all of the outstanding principal of the Notes as a current rather than long-term liability, which could result in a material reduction of our net working capital during those periods.
The convertible note hedge and warrant transactions may affect the value of our common stock.
In connection with the offering of the Notes, we entered into convertible note hedge transactions with an affiliate of one of the initial purchasers of the Notes and certain other financial institutions (the “option counterparties”). We also entered into warrant transactions with the option counterparties. The convertible note hedge transactions are expected generally to reduce the potential dilution to our common stock upon any conversion of Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted Notes, as the case may be. However, the warrant transactions separately have, and could continue to have a dilutive effect on our common stock to the extent that the market price per share of our common stock exceeds the strike price of the warrants. In addition, the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are likely to do so in connection with any conversion of the Notes or redemption or repurchase of the Notes), which could cause or avoid an increase or a decrease in the market price of our common stock.
Changes in the credit quality of the option counterparties may affect the efficacy of our hedge and warrant transactions. By entering into the hedge and warrant transactions, we are subject to the risk that the option counterparties may incur significant financial hardships, potentially resulting in their default under the convertible note hedge transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral. If an option counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under the convertible note hedge transactions with such option counterparty. Our exposure will depend on many factors but, generally, an increase in our exposure will be correlated to an increase in the market price and in the volatility of our common stock. In addition, upon a default by an option counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances that the hedge or warrant transactions will have the intended effects or as to the financial stability or viability of the option counterparties.
General Risk Factors
Changes in our tax rates, exposure to additional tax liabilities, or the adoption of new tax legislation could adversely affect our business and financial condition.
We are subject to taxes in the United States and foreign jurisdictions.jurisdictions in which we operate. Our future effective tax rates could be affected by several factors, many of which are outside of our control, including: changes in the mix of earnings with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in federal, state, and international tax laws or their interpretation, adjustments to income tax expense upon the finalization of tax returns, changes in tax attribute,attributes, or changes in federal, state, and international tax laws and accounting principles. We regularly assess the likelihood of adverse outcomes to determine the adequacy of our provision for taxes. We are also subject to examination of our income tax returns by the Internal Revenue Service and other tax authorities. There can be no assurance that the outcomes from these examinations will not materially
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adversely affect our financial condition and operating results. Forecasting our estimated annual effective tax rate is complex and subject to uncertainty, and there may be a material difference between the forecasted and the accrualaccrued effective tax rates.rates, especially due to the volatility and uncertainty of global economic conditions resulting from the COVID-19 pandemic. Any increase in our effective tax rate would reduce our profitability.
Catastrophic events may disrupt our business and harm our operating results.
We rely on our network infrastructure, data centers, enterprise applications, and technology systems for the development, marketing, support, and sales of our products, and for the internal operation of our business. These systems are susceptible to disruption or failure in the event of a majoran extreme weather condition, including earthquake, fire, flood, ice and snow storms or other natural disasters, as well as cyber-attack, terrorist attack, telecommunications failure, epidemic or pandemic (such as the ongoing COVID-19 pandemic), or other catastrophic event. Many of these systems are housed or supported in or around our corporate headquarters located in Northern California, near major earthquake faults and which may be vulnerable to climate change effects, and where a significant portion of our research and development activities and other critical business operations take place. Other critical systems, including our manufacturing facilities for our consumable medication packages, are housed in St. Petersburg, Florida, in communities that have been subject to significant tropical storms.storms, which tropical storms may be intensified or occur with increasing frequency as a result of climate change. Disruptions to, or the failure of any of these systems, and the resulting loss of critical data, which is not quickly recoverable by the effective execution of disaster recovery plans designed to reduce such disruption, could cause delays in our product development, prevent us from fulfilling our customers’ orders, and could severely affect our ability to conduct normal business operations, the result of which would adversely affect our operating results.
Section 404 of the Sarbanes-Oxley Act of 2002 and the related rules and regulations of the United States Securities and Exchange Commission (“SEC”) require annual management assessments of the effectiveness of our internal control over financial reporting, and a report by our independent registered public accounting firm attesting to the United Kingdom’s referendum vote in favoreffectiveness of leaving the European Union and related actions could adversely affect us.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are currently no unresolved issues with respect to any SEC staff’s written comments.
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ITEM 2. PROPERTIES
Our headquarters are located in a leased facilitiesfacility in Mountain View, California. The following is a list of our material leased facilities and their primary functions.
functions:
| Site | Major Activity | Approximate Square Footage | ||||||||||||||
| St. Petersburg, Florida | Administration, marketing, research and development, sales, and manufacturing | |||||||||||||||
| Cranberry Township, Pennsylvania | Administration, marketing, research and development, sales, technical support, and training | 119,400 | ||||||||||||||
| Warrendale, Pennsylvania | Manufacturing and administration | 107,400 | ||||||||||||||
| Mountain View, California | Administration, marketing, and research and development | |||||||||||||||
| Irlam, United Kingdom | Administration, sales, marketing, and distribution center | 61,000 | ||||||||||||||
| Milpitas, California | Manufacturing | 46,300 | ||||||||||||||
| Waukegan, Illinois | Technical services, support, training, and repair center | 38,500 | ||||||||||||||
| Fort Worth, Texas | Administration, sales, marketing, and research and development | 34,400 | ||||||||||||||
| Plano, Texas | Administration, sales, marketing, and research and development | 23,500 | ||||||||||||||
| Bochum, Germany | Administration, sales, marketing, distribution, and manufacturing center | |||||||||||||||
We also have smaller rented officesfacilities in Strongsville, Ohio, Canada, Germany, France, Italy,Ohio; Austin, Texas; Houston, Texas; Grapevine, Texas; New York, New York; Maryland; Germany; France; Italy; the People’s Republic of China,China; the United Arab Emirates,Emirates; Australia; and the United Kingdom.
We believe that these facilities are sufficient for our current operational needs and that suitable additional space will be available on commercially reasonable terms to accommodate expansion of our operations, if necessary.
For additional information regarding our obligations pursuant to operating leases, seerefer to Note 10, Commitments and Contingencies12, Lessee Leases, of the Notes to Consolidated Financial Statements in this annual report.Annual Report on Form 10-K.
ITEM 3. LEGAL PROCEEDINGS
Refer to the information set forth under “Legal Proceedings” in Note 10, 13, Commitments and Contingencies, of the Notes to Consolidated Financial Statements included in this annual report.Annual Report on Form 10-K.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Market for Our Common Stock
Our common stock is traded on Thethe NASDAQ Global Select Market under the symbol “OMCL.”
Stockholders
There were 9078 registered stockholders of record as of December 31, 2018.February 18, 2022. A substantially greater number of stockholders are beneficial holders, whose shares of record are held by banks, brokers, and other financial institutions.
Dividend Policy
We have never declared or paid any cash dividends on our common stock. We currently expect to retain any future earnings for use in the operation and expansion of our business and do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Performance Graph
The following graph compares total stockholder returns for Omnicell’s common stock for the past five years to three indexes: the NASDAQ Composite Index, the NASDAQ Health Care Index, and the NASDAQ Health Services Index. The graph assumes $100 was invested in each of the Company’sOmnicell’s common stock, the NASDAQ Composite Index, the NASDAQ Health Care Index, and the NASDAQ Health Services Index as of the market close on December 31, 2013.2016. The total return for Omnicell’s common stock and for each index assumes the reinvestment of all dividends, although cash dividends have never been declared on Omnicell’s common stock, and is based on the returns of the component companies weighted according to their capitalization as of the end of each annual period.
The NASDAQ Composite Index tracks the aggregate price performance of equity securities traded on The NASDAQ Stock Market. The NASDAQ Health Care Index and NASDAQ Health Services Index tracks the aggregate price performance of health carehealthcare and health services equity securities. Omnicell’s common stock is traded on The NASDAQ Global Select Market and is a component of both indexes. The stock price performance shown on the graph is based on historical results and isshould not necessarily indicativebe relied upon as an indication of future price performance.
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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN (1) (2)
Among Omnicell, Inc., the NASDAQ Composite Index, the NASDAQ Health Care Index, and
the NASDAQ Health Services Index
(1)$100 invested on December 31, 2016 in stock or index, including reinvestment of dividends.
| Year Ended December 31, | |||||||||||||||||
| 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | ||||||||||||
| Omnicell, Inc. | 100.00 | 129.73 | 121.74 | 132.78 | 189.97 | 239.87 | |||||||||||
| NASDAQ Composite | 100.00 | 114.62 | 122.81 | 133.19 | 172.11 | 165.84 | |||||||||||
| NASDAQ Health Care | 100.00 | 128.57 | 135.12 | 111.20 | 133.31 | 126.07 | |||||||||||
| NASDAQ Health Services | 100.00 | 123.14 | 134.70 | 110.22 | 131.32 | 155.16 | |||||||||||
| Year Ended December 31, | |||||||||||||||||||||||||||||||||||
| 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | ||||||||||||||||||||||||||||||
| Omnicell, Inc. | $ | 100.00 | $ | 143.07 | $ | 180.65 | $ | 241.06 | $ | 354.04 | $ | 532.27 | |||||||||||||||||||||||
| NASDAQ Composite | 100.00 | 129.64 | 125.96 | 172.17 | 249.51 | 304.85 | |||||||||||||||||||||||||||||
| NASDAQ Health Care | 100.00 | 126.86 | 125.46 | 151.60 | 190.16 | 186.02 | |||||||||||||||||||||||||||||
| NASDAQ Health Services | 100.00 | 116.65 | 140.03 | 190.67 | 307.73 | 218.38 | |||||||||||||||||||||||||||||
Stock Repurchase Program
Equity Offerings
| Year Ended December 31, | |||||||||||||||||||
2018 (6) | 2017 (1) (5) | 2016 (2) (5) | 2015 (3) | 2014 (4) | |||||||||||||||
| (In thousands, except per share amounts) | |||||||||||||||||||
| Consolidated Statements of Operations Data | |||||||||||||||||||
| Total revenue | $ | 787,309 | $ | 712,714 | $ | 695,908 | $ | 484,559 | $ | 440,900 | |||||||||
| Gross profit | 372,330 | 318,637 | 317,085 | 247,930 | 233,860 | ||||||||||||||
| Income from operations | 44,392 | 11,145 | 21,405 | 48,632 | 49,583 | ||||||||||||||
| Net income | 37,729 | 30,518 | 9,756 | 30,760 | 30,518 | ||||||||||||||
| Net income per share: | |||||||||||||||||||
| Basic | $ | 0.96 | $ | 0.81 | $ | 0.27 | $ | 0.86 | $ | 0.86 | |||||||||
| Diluted | $ | 0.93 | $ | 0.79 | $ | 0.26 | $ | 0.84 | $ | 0.83 | |||||||||
| Shares Used in Per Share Calculations | |||||||||||||||||||
| Basic | 39,242 | 37,483 | 36,156 | 35,857 | 35,650 | ||||||||||||||
| Diluted | 40,559 | 38,712 | 36,864 | 36,718 | 36,622 | ||||||||||||||
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| December 31, | |||||||||||||||||||
| 2018 | 2017 (1) (5) | 2016 (2) (5) | 2015 (3) (5) | 2014 (4) | |||||||||||||||
| (In thousands) | |||||||||||||||||||
| Consolidated Balance Sheet Data | |||||||||||||||||||
| Total assets | $ | 1,081,242 | $ | 1,016,362 | $ | 966,884 | $ | 602,022 | $ | 560,214 | |||||||||
| Long-term debt, net | 135,417 | 194,917 | 245,731 | — | — | ||||||||||||||
| Total liabilities | 401,625 | 462,021 | 508,048 | 181,558 | 170,116 | ||||||||||||||
| Total stockholders’ equity | $ | 679,617 | $ | 554,341 | $ | 458,836 | $ | 420,464 | $ | 390,098 | |||||||||
ITEM 6. [Reserved] |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related notesNotes in this annual report.Annual Report on Form 10-K. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Item 1A “Risk
Factors” and elsewhere in this annual report.Annual Report on Form 10-K. Unless otherwise stated, references in this reportAnnual Report to particular years or quarters refer to our fiscal year and the associated quarters of those fiscal years.
We have elected to omit discussion of the earliest of the three years covered by the Consolidated Financial Statements presented. Such omitted discussion can be found under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, located in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 24, 2021, for reference to discussion of the fiscal year ended December 31, 2019, the earliest of the three fiscal years presented.
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 a leading provider of medicationdoing so with an industry-leading comprehensive intelligent infrastructure, bringing together technology, analytics, and supply dispensing automation, central pharmacy automation, analytics software,expert services to equip and medication adherence solutions. As we buildempower pharmacists and pharmacies to focus on ourclinical care rather than administrative tasks. We believe this intelligent infrastructure provides the critical foundation for realizing the industry vision of the Autonomous Pharmacy, - a more fully automatedvision defined by pharmacy leaders for improving operational efficiencies and digitized system ofultimately targeting zero-error medication management - we believe we will further help enable healthcare providersmanagement.
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 safety, increase efficiency, lower costs, tighten regulatory complianceengagement and address population health challenges.
reduce costly hospital readmissions. We sell our product and consumable solutions together with related service offerings. RevenueRevenues generated in the United States represented 87%90% of our total revenues in 2018. We have not sold infor the year ended December 31, 2021.
Over the past several years, our business has expanded from a single-point solution to a platform of products and have no future plansservices that will help to sell ourfurther advance the industry vision of the Autonomous Pharmacy. This expansion has resulted in larger deal sizes across multiple products, either directly or indirectly, toservices, and implementations for customers located in countries that are identified as state sponsors of terrorism by the U.S. Department of State, or those subject to economic sanctions and, export controls.
In addition to product solution sales, we provide services to our customers. We provide installation planning and consulting as part of everymost product salesales which is generally included in the initial price of the solution. We also provide Advanced Services such as Omnicell One, EnlivenHealth, 340B solutions, 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.
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The growthfollowing 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.
Our full-time employee headcount of approximately 3,800 on December 31, 2021, an increase of approximately 940 employees since December 31, 2020, reflects our efforts to grow Omnicell’s operations, including through the impact of incremental headcount in connection with recent acquisitions, while continuing to drive profitability and optimizing resource allocation.
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 Adherencemedication 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 thebeginning 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
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critical than ever as health systems appear to face increasing labor shortages and supply chain disruption following the COVID-19 pandemic. 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 was primarily driven by furthergenerating 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. The newly acquired ReCept Holdings, Inc. (“ReCept”) solution provides implementation and managed services for health systems and other provider organizations to optimize their specialty pharmacy programs and the related pharmaceutical aspects of patient care.
The 340B market penetrationis 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, 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 automatedEnlivenHealth portfolio of software products and semi-automatedservices, along with medication adherence packaging, equipment within the United States and Europe, Middle East and Africa, as well as modest price increases across the product lines.
We believe our focustechnology, services, and solutions within these market categories position us well to remain on improving outcomes for healthcareaddress the needs of acute, post-acute, ambulatory, and retail pharmacy providers and patients. health plans.
COVID-19 Update
We expect our investment in differentiated products, new markets,continue to closely monitor the COVID-19 pandemic and acquisitions and partnerships to continue.
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dynamic situation and may adjust our outlook as appropriate. The ongoing impact of the COVID-19 pandemic may result in increased borrowing costs and other costs of capital or otherwise adversely affect our business, results of operations, financial condition, and liquidity. 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.
Acquisitions
On December 31, 2018, an increase of approximately 130 from December 31, 2017, reflects our efforts to drive profitability and optimize resources allocation.
On December 29, 2021, we completed the acquisition of ReCept pursuant to the terms and presented as partconditions of the Medication Adherence segment.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 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.
On October 1, 2020, we completed the acquisition of the 340B Link business (the “340B Link Business”) of Pharmaceutical Strategies Group, LLC pursuant to the terms and conditions of the Equity Purchase Agreement, dated August 11, 2020, as amended, by and among the Company, PSGH, LLC, BW Apothecary Holdings, LLC, the sellers identified therein and the sellers’ representative for total cash consideration of $225.0 million. The acquisition adds a comprehensive and differentiated suite of software-enabled services and solutions used by certain eligible hospitals, health systems, clinics, and entities to manage compliance and capture 340B drug cost savings on outpatient prescriptions filled through the eligible entity’s pharmacy or a contracted pharmacy partner. The results of the operations of the 340B Link Business have been included in our consolidated results of operations beginning October 1, 2020.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with United StatesU.S. Generally Accepted Accounting Principles (“U.S. GAAP”). The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues 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 Consolidated Financial Statements:
Revenue Recognition
We earn revenues from sales of our medication and supply dispensing automation systems, along with consumablesproducts and related services, which are sold in the healthcare industry, our principal market. The transaction price
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Prior to recognizing revenue, we identify the contract, performance obligations, and transaction price, and allocate the transaction price to the performance obligations. All identified contracts meet the following required criteria:
Parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. A majority of our contracts are evidenced by a non-cancelable written agreement. Contracts for consumable products are generally evidenced by an order placed via phone or a manual purchase order.
Entity can identify each party’s rights regarding the goods or services to be transferred. Contract terms are documented within the written agreements. Where a written contract does not exist, such as for consumable products, the rights of each party are understood as following our standard business process and terms.
The entity can identify the payment terms for the goods or services to be transferred. Payment terms are documented within the agreement and are generally net 30 to 60 days from shipment of tangible product or services performed.performed for customers in the United States. Where a written contract does not exist, our standard payment terms are net 30 day terms.
The contract has commercial substance (that is the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract.)contract). Our agreements are an exchange of cash for a combination of products and services which result in changes in the amount of our future cash flows.
It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. We perform a credit check for all significant customers or transactions and
where collectability is not probable, payment in full or a substantial down payment prior to shipment is typically required to help assure the full agreed upon contract price will be collected.
Distinct goods or services are identified as performance obligations. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer are considered a single performance obligation. Where a good or service is determined not to be distinct, we combine the good or service with other promised goods or services until a bundle of goods or services that is distinct is identified. To identify our performance obligations, we consider all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. When performance obligations are included in separate contracts, we consider an entire customer arrangement to determine if separate contracts should be considered combined for the purposes of revenue recognition. Most of our sales, other than renewals of support and maintenance, contain multiple performance obligations, with a combination of hardware systems, consumables and software products, consumables, support and maintenance, and professional services.
The transaction price of a contract is determined based on the fixed consideration, net of an estimate for variable consideration such as various discounts or rebates provided to customers. As a result of our commercial selling practices, contract prices are generally fixed with minimal, if any, variable consideration.
The transaction price is allocated to separate performance obligations proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price we charge for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, our products and services are not generally sold separately. We use an amount discounted from the list price as a best estimated selling price.
We recognize revenue when the performance obligation has been satisfied by transferring a promised good or service to a customer. The good or service is transferred when or as the customer obtains control of the good or service. Determining when control transfers requires management to make judgments that affect the timing of revenues recognized. Generally, for products requiring a complex implementation, control passes when the product is installed and ready for use. For all other products, control generally passes when product has been shipped and title has passed. For maintenance contracts and certain other services, including SaaS, subscription software, and technology-enabled services, provided on a subscription basis, control passes to the customer over time, generally ratably over the service term as we provide a stand-ready service to servicefor the customer’s equipment. Time and material services transfer control to the customer at the time the services are provided. The portion of the transaction price allocated to our unsatisfied performance obligations are recorded as deferred revenues.
Revenues, contract assets, and contract liabilities are recorded net of associated taxes.
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or changes to the configuration of the equipment where the overall nature of the contract remains intact. Our change orders generally result in the change being accounted for as modifications of existing contracts given the nature of the impacted orders.
In the normal course of business, we typically do not accept product returns unless the item is defective as manufactured or the configuration of the product is incorrect. We establish provisions for estimated returns based on historical product returns. The allowance for sales returns is not material to our Consolidated Financial Statements for any periods presented.
We determine if an arrangement is a lease at inception. The transaction price is allocated to separate performance obligations, generally consisting of a combination of hardware systems, software products, support and maintenance, and professional services, proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price we charge for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, our salesproducts and services are made through multi-yearnot generally sold separately. We use an amount discounted from the list price as a best estimated selling price.
Sales-Type Leases
We enter into non-cancelable sales-type lease agreements. Underarrangements, most of which do not have an option to extend the lease term. At the end of the lease term, the customer must either return the equipment or negotiate a new agreement, resulting in a new purchase or lease transaction. Failure of the customer to either return the equipment or negotiate a new agreement results in the contract becoming a month-to-month rental. Certain sales-type leases automatically renew for successive one-year periods at the end of each lease term without written notice from the customer. Our sales-type lease agreements do not contain any material residual value guarantees.
For sales-type leases, we recognize revenuerevenues for our hardware and software products, net of lease execution costs, such as post-installation product maintenance, and technical support, at the net present value of the lease payment stream once our installation obligations have been met. upon customer acceptance. We recognize service revenues associated with sales-type leases ratably over the term of the agreement in service revenues in the Consolidated Statements of Operations. We recognize interest income from sales-type leases using the effective interest method. Both hardware and software revenues, and interest income from sales-types leases are recorded in product revenues in the Consolidated Statements of Operations.
We optimize cash flows by selling a majority of our non-U.S. government sales-type leases to third-party leasing finance companies on a non-recourse basis. We have no obligation to the leasing company once the lease has been sold. Some of our sales-type leases, mostly those relating to U.S. government hospitals, which comprise approximately 49% of the lease receivable balance, are retained in-house. Interest income in these leases is recognized in product revenues using the effective interest method.
Allowance for Doubtful Accounts and Notes Receivables from Investment in Sales-Type LeasesCredit Losses
We maintain an allowance for doubtful accounts for estimatedare exposed to credit losses resulting from the inabilityprimarily through sales of our customers to make required payments. We record a specific allowance based on an analysis of individual past-due balances. Additionally, based on historical write-offsproducts and services, as well as our collection experience, we record an additional allowance based on a percentage of outstanding receivables.sales-type leasing arrangements. We perform credit evaluations of our customers’ financial condition.condition in order to assess each customer’s ability to pay. These evaluations require significant judgment and are based on a variety of factors including, but not limited to, current economic trends, payment history, and a financial review of the customer. We continue to monitor customers’ creditworthiness on an ongoing basis.
We maintain an allowance for credit losses for accounts receivable, unbilled receivables, and net investment in sales-type leases based on expected credit losses resulting from the inability of our customers to make required payments. The allowance for credit losses is measured using a loss rate method, considering factors such as customers’ credit risk, historical loss experience, current conditions, and forecasts. The allowance for credit losses is measured on a collective (pool) basis by aggregating customer balances with similar risk characteristics. We also record a specific allowance based on an analysis of individual past due balances or customer-specific information, such as a decline in creditworthiness or bankruptcy. Actual collection losses may differ from management’s estimates, and such differences could be material to our financial position and results of operations.
Inventory
Inventories are stated at the lower of cost, computed using the first-in, first-out method, and net realizable value. Inbound shipping costs are included in cost of inventory. We regularly monitor inventory quantities on hand and record write-downs for excess and obsolete inventories based on our estimate of demand for our products, potential obsolescence of technology, product life cycles, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross margins. If inventory is written down, a new cost basis is established that
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cannot be increased in future periods. Shipments from suppliers or contract manufacturers before we receive them are recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to us.
Software Development Costs
We capitalize certain software development costs in accordance with Accounting Standards Codification (“ASC”) 985-20, Costs of Software to Be Sold, Leased, or Marketed, under which certain software developmentthose costs incurred subsequent to the
establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products. We establish technological feasibility when we complete a detail program design or a working model andmodel. We amortize development costs over the estimated lives of the related products, ranging from three towhich is generally five years. All development costs prior to the completion of a detail program design or a working model are recognized as research and development expense.
Lessee Leases
We determine if an arrangement is a lease at inception. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our lease contracts do not provide an implicit rate, we use our incremental borrowing rate based on information available at the commencement date in determining the present value of the lease payments. Lease expense is recognized on a straight-line basis over the lease term. We do not recognize a right-of-use asset and a lease liability for leases with an initial term of twelve months or less. We elected the practical expedient to not separate lease components from nonlease components and applied that practical expedient to all material classes of leased assets.
Many of our operating leases include an option to extend the lease. The specific terms and conditions of the extension options vary from lease to lease, but are consistent with standard industry practices in each area that we operate. We review each of our lease options at a time required by the terms of the lease contract, and notify the lessor if we choose to exercise the lease renewal option. Until we are reasonably certain that we will extend the lease contract, the renewal option periods will not be recognized as right-of-use assets or lease liabilities.
Certain leases include provisions for early termination, which allow the contract parties to terminate their obligations under the lease contract. The terms and conditions of the termination options vary by contract. When we have made a decision to exercise an early termination option, the right-of-use assets and associated lease liabilities are remeasured in accordance with the present value of the remaining cash flows under the lease contract.
Certain building lease agreements include rental payments subject to change annually based on fluctuations in various indexes (i.e. Consumer Price Index (“CPI”), Retail Price Index, and other international indexes). Certain data center lease agreements include rental payments subject to change based on usage and CPI fluctuations. The changes based on usage and indexes are treated as variable lease costs and recognized in the period in which the obligation for those payments was incurred.
Business Combinations
We use the acquisition method of accounting under the authoritative guidance on business combinations.ASC 805, Business Combinations. Each acquired company’s operating results are included in our Consolidated Financial Statements starting on the date of acquisition.acquisition date. The purchase price is equivalent to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired and liabilities assumed as of the acquisition date of acquisition are recorded at the acquisition date fair value. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed.
Amounts allocated to assets and liabilities are based upon fair values. Such valuations require management to make significant estimates and assumptions, especially with respect to the identifiable intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable and that of a market participant. These estimates are based on available historical experience and information obtained from the management of the acquired companiesas well as future expectations, and the estimates are inherently uncertain. The separately identifiable intangible assets generally include customer relationships, acquired technology, backlog, trade names, and trade names.non-compete agreements.
Goodwill and Acquired Intangible Assets
We review goodwill for impairment on an annual basis on the first day of the fourth quarter of each year at the reporting unit level. This assessment is also performed whenever there is a change in circumstances that indicates the carrying value of goodwill may be impaired. OurWe have one reporting units areunit, which is the same as our operating segments, which are Automation and Analytics and Medication Adherence.segment. A qualitative assessment is initially made to determine whether it is necessary to perform quantitative testing. A qualitative assessment includes, among others, consideration of: (i) past, current, and projected future earnings and equity; (ii) recent trends and
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market conditions; and (iii) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available. If this qualitative assessment indicates that it is more likely than not that impairment exists, or if we decide to bypass this option, we proceed to the quantitative assessment. The quantitative assessment involves a comparison between the estimated fair valuesvalue of our reporting unitsunit with their respectiveits carrying amountsamount including goodwill. If the carrying value exceeds estimated fair value, we will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.goodwill.
To determine eachthe reporting unit’s fair value under the quantitative approach, we use a combination of income and market approaches, equally weighting the two approaches, such as estimated discounted future cash flows of thatthe reporting unit, multiples of earnings or revenues, and analysis of recent sales or offerings of comparable entities. We also consider our market capitalization on the date of the analysis to ensure the reasonableness of the sum of itsour reporting units’unit’s fair value.
We assess the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Recoverability of an asset is measured by the comparison of the carrying amount to the sum of the undiscounted estimated future cash flows the asset is expected to generate, offset by estimated future costs to dispose of the product to which the asset relates. If an asset is considered to be impaired, the amount of such impairment would be measured as the difference between the carrying amount of the asset and its fair value. Our cash flow assumptions are based on historical and forecasted future revenue, operating costs, and other relevant factors. Assumptions and estimates about the remaining useful lives of our intangible assets are subjective and are affected by changes to our business strategies. If management’s estimates of future operating results change, or if there are changes to other assumptions, the
estimate of the fair value of our assets could change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition.
Convertible Debt
We account for convertible debt and related transactions in accordance with ASC 470-20, Debt with Conversion and Other Options, ASC 815, Derivatives and Hedging, and ASC 480, Distinguishing Liabilities from Equity. We evaluate convertible debt instruments and related transactions at inception to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. Convertible debt instruments that may be settled in cash are separated into liability and equity components. The allocation to the liability component is based on the fair value of a similar instrument that does not contain an equity conversion option. Based on this debt-to-equity ratio, debt issuance costs are then allocated to the liability and equity components in a similar manner. The difference between the principal amount of the convertible debt instruments and the liability component, inclusive of issuance costs, represents the debt discount, which is amortized to interest expense over the term of instruments. The determination of the discount rate requires certain estimates and assumptions.
Convertible note hedge and warrant transactions associated with convertible debt instruments are accounted for as equity instruments, and are recorded in additional paid-in capital in the Consolidated Balance Sheets.
Valuation of Share-Based Compensation
We account for share-based compensation in accordance with ASC 718, Stock Compensation. We recognize compensation expense related to share-based compensation based on the grant date estimated fair value.
The fair value of stock options (“options”) on the grant date is estimated using the Black-Scholes option pricing model, which requires the following inputs: expected life, expected volatility, risk-free interest rate, expected dividend yield rate, exercise price, and closing price of itsour common stock on the date of grant. The expected volatility is based on a combination of historical and market-based implied volatility, and the expected life of the awards is based on our historical experience of employee stock option exercises, including forfeitures. Expense is recognized on a straight-line basis over the requisite service period.
The fair value of restricted stock units (“RSUs”) is based on the stock price on the grant date. The fair value of restricted stock awards (“RSAs”) is their intrinsic value, which is the difference between the fair value of the underlying stock
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at the measurement date and the purchase price. The RSUs and RSAs are subject to a service vesting condition and are recognized on a straight-line basis over the requisite service period.
The fair value of performance-based stock unit awards (“PSUs”) with service and market conditions is estimated using a Monte Carlo simulation model applying a multiple awards approach. Expense is recognized when it is probable that the performance condition will be met using the accelerated attribution method over the requisite service period.
Forfeiture rates are estimated based on our historical experience with equity awards that were granted and forfeited prior to vesting. The valuation assumptions used in estimating the fair value of employee share-based awards may change in future periods.
Accounting for Income Taxes
We record an income tax provision for (benefit from) the anticipated tax consequences of the reported results of operations. In accordance with U.S.GAAP,ASC 740, Income Taxes, the provision for (benefit from) income taxes is computed using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities, and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the periods in which those tax assets and liabilities are expected to be realized or settled. In the event that these tax rates change, we will incur a benefit or detriment on our income tax expense in the period of change. If we were to determine that all or part of the net deferred tax assets are not realizable in the future, we will record a valuation allowance that would be charged to earnings in the period such determination is made.
In accordance with ASC 740,Income Taxes, we recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of U.S. GAAPASC 740 and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results.
Recently Issued Authoritative Guidance
Refer to Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements in this annual reportAnnual Report on Form 10-K 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
| Change in | Change in | ||||||||||||||||||||||
| 2018 | $ | % | 2017 | $ | % | 2016 | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Product revenues | $ | 569,595 | $ | 59,394 | 12% | $ | 510,201 | $ | (17,526 | ) | (3)% | $ | 527,727 | ||||||||||
| Percentage of total revenues | 72% | 72% | 76% | ||||||||||||||||||||
| Service and other revenues | 217,714 | 15,201 | 8% | 202,513 | 34,332 | 20% | 168,181 | ||||||||||||||||
| Percentage of total revenues | 28% | 28% | 24% | ||||||||||||||||||||
| Total revenues | $ | 787,309 | $ | 74,595 | 10% | $ | 712,714 | $ | 16,806 | 2% | $ | 695,908 | |||||||||||
| Year Ended December 31, | Change in | ||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Product revenues | $ | 812,512 | $ | 636,031 | $ | 176,481 | 28% | ||||||||||||||||||||||||||||||||||
| Percentage of total revenues | 72% | 71% | |||||||||||||||||||||||||||||||||||||||
| Services and other revenues | 319,506 | 256,177 | 63,329 | 25% | |||||||||||||||||||||||||||||||||||||
| Percentage of total revenues | 28% | 29% | |||||||||||||||||||||||||||||||||||||||
| Total revenues | $ | 1,132,018 | $ | 892,208 | $ | 239,810 | 27% | ||||||||||||||||||||||||||||||||||
Product revenues represented 72% and 71% of total revenues for the years ended December 31, 20182021 and December 31, 2017.2020, respectively. Product revenues increased by $59.4$176.5 million, due to increased sales of $55.0 million incustomer demand, primarily within our Automation and Analytics segment and increased sales of $4.4 million in our Medication Adherence segment. The increase in the Automation and Analytics segment was attributed to an increase in sales of XT series products as the salesautomated dispensing systems business. In comparison, results for the year ended December 31, 2017 had a slower conversion of bookings and backlog into revenues due to2020 were impacted by the introduction of the new XT series of products in the fourth quarter of 2016, an increase in sales of Performance Center, and an increase in sales of other products. The increase in the Medication Adherence segment was primarily attributed to higher completed installations of our VBM products compared to the year ended December 31, 2017.COVID-19 pandemic as health systems were focusing resources on COVID-19 essential activities.
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Our international sales represented 13%, 14%,10% and 15%11% of total revenues for the years ended December 31, 2018, December 31, 2017,2021 and December 31, 2016,2020, respectively, and are expected to be affected by foreign currency exchange ratesrate fluctuations. The decrease in international revenues as a percentage of our total revenues was primarily related to our acquired companies, Aesynt and Ateb, which have a greater market presence in United States compared to international markets. We are unable to predict the extent to which revenuerevenues in future periods will be impacted by changes in foreign currency exchange rates.
Our ability to continue to grow revenuerevenues is dependent on our ability to continue to obtain orders from customers, 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 manpowerworkforce allocations among customers to complete installations on a timely basis. The timing of our product revenues for equipment is primarily dependent on when our customers’ schedules allow for installations.
| Change in | Change in | ||||||||||||||||||||||
| 2018 | $ | % | 2017 | $ | % | 2016 | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Revenues: | |||||||||||||||||||||||
| Automation and Analytics | $ | 655,679 | $ | 68,738 | 12% | $ | 586,941 | $ | (9,970 | ) | (2)% | $ | 596,911 | ||||||||||
| Percentage of total revenues | 83% | 82% | 86% | ||||||||||||||||||||
| Medication Adherence | 131,630 | 5,857 | 5% | 125,773 | 26,776 | 27% | 98,997 | ||||||||||||||||
| Percentage of total revenues | 17% | 18% | 14% | ||||||||||||||||||||
| Total revenues | $ | 787,309 | $ | 74,595 | 10% | $ | 712,714 | $ | 16,806 | 2% | $ | 695,908 | |||||||||||
Cost of Revenues and Gross Profit
Cost of revenues is primarily comprised of three general categories: (i) standard product costs which accountsaccount 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, as we install our equipment at the customer site and includeincluding costs of the field installation personnel including labor, travel expense, 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.
| Year Ended December 31, | Change in | ||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||||||||||||||||||||
| Cost of product revenues | $ | 422,855 | $ | 354,004 | $ | 68,851 | 19% | ||||||||||||||||||||||||||||||||||
| As a percentage of related revenues | 52% | 56% | |||||||||||||||||||||||||||||||||||||||
| Cost of services and other revenues | 154,510 | 124,912 | 29,598 | 24% | |||||||||||||||||||||||||||||||||||||
| As a percentage of related revenues | 48% | 49% | |||||||||||||||||||||||||||||||||||||||
| Total cost of revenues | $ | 577,365 | $ | 478,916 | $ | 98,449 | 21% | ||||||||||||||||||||||||||||||||||
| As a percentage of total revenues | 51% | 54% | |||||||||||||||||||||||||||||||||||||||
| Gross profit | $ | 554,653 | $ | 413,292 | $ | 141,361 | 34% | ||||||||||||||||||||||||||||||||||
| Gross margin | 49% | 46% | |||||||||||||||||||||||||||||||||||||||
| Change in | Change in | ||||||||||||||||||||||
| 2018 | $ | % | 2017 | $ | % | 2016 | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Cost of revenues: | |||||||||||||||||||||||
| Automation and Analytics | $ | 319,257 | $ | 10,814 | 4% | $ | 308,443 | $ | (2,524 | ) | (1)% | $ | 310,967 | ||||||||||
| As a percentage of related revenues | 49% | 53% | 52% | ||||||||||||||||||||
| Medication Adherence | 95,722 | 10,088 | 12% | 85,634 | 17,778 | 26% | 67,856 | ||||||||||||||||
| As a percentage of related revenues | 73% | 68% | 69% | ||||||||||||||||||||
| Total cost of revenues | $ | 414,979 | $ | 20,902 | 5% | $ | 394,077 | $ | 15,254 | 4% | $ | 378,823 | |||||||||||
| As a percentage of total revenues | 53% | 55% | 54% | ||||||||||||||||||||
| Gross profit: | |||||||||||||||||||||||
| Automation and Analytics | $ | 336,422 | $ | 57,924 | 21% | $ | 278,498 | $ | (7,446 | ) | (3)% | $ | 285,944 | ||||||||||
| Automation and Analytics gross margin | 51% | 47% | 48% | ||||||||||||||||||||
| Medication Adherence | 35,908 | (4,231 | ) | (11)% | 40,139 | 8,998 | 29% | 31,141 | |||||||||||||||
| Medication Adherence gross margin | 27% | 32% | 31% | ||||||||||||||||||||
| Total gross profit | $ | 372,330 | $ | 53,693 | 17% | $ | 318,637 | $ | 1,552 | —% | $ | 317,085 | |||||||||||
| Total gross margin | 47% | 45% | 46% | ||||||||||||||||||||
The increase in cost of product revenues iswas primarily due todriven by the increase in product revenues of $68.7$176.5 million for the year ended December 31, 20182021 compared to the year ended December 31, 2017,2020, as well as increased inventory-related costs due to inflationary impacts during the second half of 2021. The increase was partially offset by the efficiencies,benefits associated with economies of scale due to higher volumes during the year ended December 31, 2021 compared to the year ended December 31, 2020, as well as a reduction of employee-related expenses for restructuring initiatives.
The increase in cost of services and cost savings onother revenues was primarily driven by the XT seriesincrease in services and other revenues of products,$63.3 million, including incremental revenues from the recent acquisitions of the 340B Link Business and FDS Amplicare, for the year ended December 31, 2021 compared to the year ended December 31, 2020, as we ramped up from their introductionwell as additional investments in our service business to support new service solutions.
The overall increase in gross margin primarily relates to higher revenues for the fourth quarteryear ended December 31, 2021 due to increased customer demand, benefits associated with economies of 2016,scale due to higher volumes, as well as the increase in salesreduction of Performance Center, which have higher gross margins.employee-related expenses for restructuring initiatives. Gross margins during the year ended December 31, 2020 were impacted by the COVID-19 pandemic. Our gross profit for the year ended December 31, 20182021 was $336.4$554.7 million, as compared to $278.5$413.3 million for the year ended December 31, 2017.2020.
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Operating Expenses and Interest and Other Income (Expense), Net
| Year Ended December 31, | Change in | ||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||||||||||||||||||||
| Research and development | $ | 75,716 | $ | 70,161 | $ | 5,555 | 8% | ||||||||||||||||||||||||||||||||||||||||
| As a percentage of total revenues | 7% | 8% | |||||||||||||||||||||||||||||||||||||||||||||
| Selling, general, and administrative | 389,430 | 307,605 | 81,825 | 27% | |||||||||||||||||||||||||||||||||||||||||||
| As a percentage of total revenues | 34% | 34% | |||||||||||||||||||||||||||||||||||||||||||||
| Total operating expenses | $ | 465,146 | $ | 377,766 | $ | 87,380 | 23% | ||||||||||||||||||||||||||||||||||||||||
| As a percentage of total revenues | 41% | 42% | |||||||||||||||||||||||||||||||||||||||||||||
| Interest and other income (expense), net | $ | (23,500) | $ | (6,177) | $ | (17,323) | 280% | ||||||||||||||||||||||||||||||||||||||||
Research and Development. Research and development expenses increased by $10.1$5.6 million for the year ended December 31, 2018 as2021 compared to the year ended December 31, 2017.2020. The increase was primarily attributed to an increase in costemployee-related expenses of revenuesapproximately $12.6 million due to increased headcount to support the continued development of our intelligent infrastructure, as well as due to incremental headcount from recent acquisitions. This increase is primarilypartially offset by a reduction of $3.6 million in employee-related expenses for restructuring initiatives, as well as various decreases due to the increase in revenuestiming of projects.
Selling, General, and Administrative. Selling, general, and administrative expenses increased by $81.8 million for the year ended December 31, 20182021 compared to the year ended December 31, 2017,2020. The increase was primarily due to an increase of approximately $50.4 million in employee-related expenses primarily related to increased headcount, including the incremental headcount from recent acquisitions, as well as an increase in acquisition-related expenses of $5.1 million, and $2.1 millionan increase in intangible asset amortization expense of excess$4.3 million. The increase was also driven by an increase in shipping and obsolete reservehandling costs, as well as higher spending related to travel, recruiting, temporary labor, consulting, maintenance contract expenses, and other operating expenses, most of which were significantly curtailed in 2020 due to the COVID-19 pandemic. The increase was partially offset by a reduction in employee-related expenses for slower moving inventory. Our gross profit for the year ended December 31, 2018 was $35.9 million as compared to $40.1restructuring initiatives of $2.2 million.
Interest and Other Income (Expense), Net. Interest and other income (expense), net, changed by $17.3 million for the year ended December 31, 2017.
Provision for (Benefit from) Income Taxes
| Year Ended December 31, | Change in | ||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | $ | % | ||||||||||||||||||||||||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | (11,842) | $ | (2,845) | $ | (8,997) | 316% | ||||||||||||||||||||||||||||||||||
| Effective tax rate on earnings | (18)% | (10)% | |||||||||||||||||||||||||||||||||||||||
We recorded an income tax benefit of $11.5$11.8 million and $6.3 million, respectively. The increase in product costs was attributed to (i) increase in product revenueshad a negative effective tax rate of $8.6 million, (ii) increase in product costs of $5.4 million related to Ateb, and (iii) product mix from higher volume of sales of lower margin products. The increase in service costs was primarily attributed to the increase in service costs of $6.3 million related to Ateb. Our gross profit18% for the year ended December 31, 2017 was $40.1 million as2021 compared to $31.1 million for the year ended December 31, 2016.
| Change in | Change in | ||||||||||||||||||||||
| 2018 | $ | % | 2017 | $ | % | 2016 | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||
| Research and development | $ | 64,843 | $ | (1,179 | ) | (2)% | $ | 66,022 | $ | 8,223 | 14% | $ | 57,799 | ||||||||||
| As a percentage of total revenues | 8% | 9% | 8% | ||||||||||||||||||||
| Selling, general, and administrative | 263,095 | 21,625 | 9% | 241,470 | 3,589 | 2% | 237,881 | ||||||||||||||||
| As a percentage of total revenues | 33% | 34% | 34% | ||||||||||||||||||||
| Total operating expenses | $ | 327,938 | $ | 20,446 | 7% | $ | 307,492 | $ | 11,812 | 4% | $ | 295,680 | |||||||||||
| As a percentage of total revenues | 42% | 43% | 42% | ||||||||||||||||||||
| Income (loss) from operations: | |||||||||||||||||||||||
| Automation and Analytics | $ | 148,119 | $ | 54,478 | 58% | $ | 93,641 | $ | (5,431 | ) | (5)% | $ | 99,072 | ||||||||||
| Operating margin | 23% | 16% | 17% | ||||||||||||||||||||
| Medication Adherence | (5,522 | ) | (3,926 | ) | 246% | (1,596 | ) | (7,894 | ) | (125)% | 6,298 | ||||||||||||
| Operating margin | (4)% | (1)% | 6% | ||||||||||||||||||||
| Corporate expenses (“Common”) | (98,205 | ) | (17,305 | ) | 21% | (80,900 | ) | 3,065 | (4)% | (83,965 | ) | ||||||||||||
| Total income from operations | $ | 44,392 | $ | 33,247 | 298% | $ | 11,145 | $ | (10,260 | ) | (48)% | $ | 21,405 | ||||||||||
| Total operating margin | 6% | 2% | 3% | ||||||||||||||||||||
| Interest and other income (expense), net | $ | (8,776 | ) | $ | (2,143 | ) | 32% | $ | (6,633 | ) | $ | 1,796 | (21)% | $ | (8,429 | ) | |||||||
| Change in | Change in | ||||||||||||||||||||||
| 2018 | $ | % | 2017 | $ | % | 2016 | |||||||||||||||||
| (Dollars in thousands) | |||||||||||||||||||||||
| Provision for (benefit from) income taxes | $ | (2,113 | ) | $ | 23,893 | (92)% | $ | (26,006 | ) | $ | (29,226 | ) | (908)% | $ | 3,220 | ||||||||
| Effective tax rate on earnings | (6)% | (576)% | 25% | ||||||||||||||||||||
Refer to 2016 was primarily due to the favorable impact from enactmentNote 17, Income Taxes, of the Tax Act.Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.
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LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $67.2$349.1 million at December 31, 2018,2021, compared to $32.4$485.9 million at December 31, 2017.2020. All of our cash and cash equivalents are invested in demand deposits only.bank accounts and money market funds held in sweep and asset management accounts with major financial institutions.
Our cash position and working capital at December 31, 20182021 and December 31, 20172020 were as follows:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Cash and cash equivalents | $ | 349,051 | $ | 485,928 | |||||||
Working capital (deficit) (1) | $ | (95,456) | $ | 552,991 | |||||||
| December 31, | |||||||
| 2018 | 2017 | ||||||
| (In thousands) | |||||||
| Cash | $ | 67,192 | $ | 32,424 | |||
| Working Capital | $ | 192,554 | $ | 147,066 | |||
Our ratio of current assets to current liabilities was 1.9:0.9:1 and 3.0:1 at December 31, 20182021 and 1.7:1 at December 31, 2017.2020, respectively.
Sources of Cash
Revolving Credit Facility
On January 5, 2016,November 15, 2019, we entered into a $400.0 million secured credit facility pursuant to a credit agreement, byan Amended and among us,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 solejoint lead arrangerarrangers and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”).agent. The A&R Credit Agreement superseded our 2016 senior secured credit facility and provides for (a) a $200.0 million term loan facility (the “Term Loan Facility”), and prior to the amendment discussed below, a $200.0 millionfive-year revolving credit facility of $500.0 million (the “Revolving Credit Facility”) and together with the Term Loan Facility, the “Facilities”).(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 $10.0$15.0 million and a swing line loan sub-limit of up to $10.0$25.0 million.
On December 26, 2017 and April 11, 2017, weSeptember 22, 2020, the parties entered into the amendmentsan amendment to the A&R Credit Agreement. Under these amendments,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 December 31, 2021, there was no outstanding balance for the Revolving Credit Facility was increased from $200.0 million to $315.0 million and certain other modificationswe were made.in full compliance with all covenants. Refer to Note 8, 9, Debt and Credit Agreements, of the Notes to the Consolidated Financial Statements included in this annual report.Annual Report on Form 10-K 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,purposes.
Convertible Senior Notes
On September 25, 2020, we completed a private offering of $575.0 million aggregate principal amount of 0.25% convertible senior notes (the “Notes”), including acquisitions.
During the fourth quarter of 2020, we were in full compliance with all covenants.
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working capital and other general corporate purposes, which may include without limitation, the acquisition of complementary businesses, the repayment of outstanding indebtedness, capital expenditurespotential acquisitions, strategic transactions, and working capital.
stock.
Uses of Cash
Our future uses of cash are expected to be primarily for working capital, capital expenditures, loan principal and interest payments, and other contractual obligations. We also expect a continued use of cash for potential acquisitions and acquisition-related activities.activities, as well as repurchases of our common stock.
Our stock repurchase programs have a total of $54.9 million remaining for future repurchases as of December 31, 2018,2021, which may result in additional use of cash. SeeRefer to Note 12, 15, Stock Repurchase Program, of the Notes to Consolidated Financial Statements included in this annual report.Annual Report on Form 10-K for additional information. In September 2020, we repurchased 749,300 shares of our common stock from purchasers of the Notes in the offering in privately negotiated transactions effected through one of the initial purchasers or its affiliate at an average price of $70.78 per share for an aggregate purchase price of approximately $53.0 million. The repurchases were made concurrently with the issuance of the Notes. The repurchases were separately authorized by the Board of Directors, and did not impact the total remaining for future purchases under the previously authorized stock purchase programs. There were no stock repurchases during the years ended December 31, 2018, December 31, 2017,2021 and December 31, 2016.2020 including under our stock repurchase programs, other than the separately-authorized one-time stock repurchase concurrent with the offering of the Notes in September 2020.
Based on our current business plan and revenueproduct 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,Employee Stock Purchase Plan (“ESPP”), along with the availability of funds under the FacilitiesRevolving 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 Consolidated Statements of Cash Flows:
| Year Ended December 31, | ||||||||||||||||||||||||||||
| Year Ended December 31, | 2021 | 2020 | ||||||||||||||||||||||||||
| 2018 | 2017 | 2016 | ||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||
| Net cash provided by (used in): | Net cash provided by (used in): | |||||||||||||||||||||||||||
| Operating activities | $ | 103,966 | $ | 24,834 | $ | 49,900 | Operating activities | $ | 231,809 | $ | 185,870 | |||||||||||||||||
| Investing activities | (54,374 | ) | (34,987 | ) | (341,323 | ) | Investing activities | (412,498) | (279,866) | |||||||||||||||||||
| Financing activities | (13,597 | ) | (9,877 | ) | 263,752 | Financing activities | 47,363 | 456,269 | ||||||||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,227 | ) | (2,034 | ) | (58 | ) | Effect of exchange rate changes on cash and cash equivalents | (974) | 437 | |||||||||||||||||||
| Net increase (decrease) in cash and cash equivalents | $ | 34,768 | $ | (22,064 | ) | $ | (27,729 | ) | ||||||||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | Net increase (decrease) in cash, cash equivalents, and restricted cash | $ | (134,300) | $ | 362,710 | |||||||||||||||||||||||
Operating activitiesActivities
We expect cash from our operating activities to fluctuate in future periods as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing of other liability payments.
Net cash provided by operating activities was $104.0$231.8 million for 2018,the year ended December 31, 2021, primarily consisting of net income of $37.7$77.8 million adjusted for non-cash items of $77.0$157.3 million, offset by changes in assets and liabilities of $10.7$3.3 million. The non-cash items primarily consisted of depreciation and amortization expense of $51.4$73.0 million, share-based compensation expense of $28.9$53.2 million, $2.3amortization of discount on convertible senior notes of $18.6 million, amortization of operating lease right-of-use assets of $11.9 million, amortization of debt financing fees,issuance costs of $3.4 million, and an increasea change in deferred income taxes of $5.7 million.
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due to timing of bookings and revenue recognition due to larger deal sizes across multiple products, services, and implementations for customers, (vi) an increase in prepaid expenses of $4.9$5.7 million, (iv) an increase in prepaid commissions of $4.0 million, (v) a decrease in deferred revenue of $2.3 million due to the timing of orders and revenue being recognized for installed product, and (vi)(vii) an increase in other currentlong-term assets of $2.1$3.3 million. These cash outflows were partially offset by (i) an increase in accrued liabilities of $34.9 million primarily due to an increase in rebates and lease buyout liabilities, (ii) an increase in accounts payablepayables of $19.7$29.1 million primarily due to thean overall increase in spending, including inventory andspending, as well as timing of payments, (iii) an increase in deferred revenues of $24.2 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, (iv) an increase in accrued compensation of $12.3 million primarily due to an increase in accrued commissions, as well as timing of payroll, (v) a decrease in the investment in sales-type leases of $6.6$3.3 million, and an increase(vi) a decrease in other accrued liabilitiescurrent assets of $4.4$2.8 million.
Net cash provided by operating activities was $49.9$185.9 million for 2016,the year ended December 31, 2020, primarily consisting of net income of $9.8$32.2 million adjusted for non-cash items $75.4of $116.4 million offset byand changes in assets and liabilities of $35.3$37.3 million. The non-cash items primarily consisted of depreciation and amortization expense of $58.4$61.1 million, share-based compensation expense of $19.5$44.7 million, amortization of operating lease right-of-use assets of $10.5 million, amortization of debt issuance costs of $1.6 million, amortization of discount on convertible senior notes of $4.8 million, and an increasea change in deferred income taxes of $5.1$6.5 million. Changes in assets and liabilities include cash outflowsinflows from (i) a $9.6 million increase in investment in sales-type leases due to additional lease transactions entered into during the year, (ii) a $7.2 million increase in prepaid commissions, (iii) a $6.3 million decrease in other long-term liabilities, (iv) a $5.1 million increase in other long-term assets, (v) a $5.0 million decrease in accounts payable due to timing of payments, (vi) a $3.4 million increase in inventories to support sales forecast, and (vii) a decrease in the deferred revenue of $1.9 million. These cash outflows were partially offset by a decrease of $9.9 million in accounts receivable and unbilled receivables as result of $36.8 million primarily due to higher collections in the fourth quarter of 2016.2020, (ii) a decrease in inventories of $12.4 million primarily due to timing of shipments and a focus on supply chain efficiencies, (iii) an increase in accrued compensation of $11.6 million primarily due to an increase in accrued commissions, as well as timing of payroll, (iv) an increase in deferred revenues of $7.6 million primarily due to the timing of shipments in order to meet customers’ implementation schedules and recognition of revenues for products requiring installation, (v) an increase in other long-term liabilities of $7.5 million primarily due to the deferral of certain payroll taxes related to the CARES Act, and (vi) an increase in accrued liabilities of $4.4 million. These cash inflows were partially offset by (i) a decrease in operating lease liabilities of $9.5 million, (ii) an increase in prepaid commissions of $8.1 million primarily due to an increase in bookings, (iii) an increase in other long-term assets of $7.7 million primarily due to an increase in unbilled receivables, (iv) an increase in other current assets of $6.4 million, (v) a decrease in accounts payables of $6.3 million primarily due to an overall decrease in spending, as well as timing of payments, (vi) an increase in investment in sales-type leases of $2.9 million, and (vii) an increase in prepaid expenses of $2.1 million.
Investing activitiesActivities
Net cash used in investing activities was $54.4$412.5 million for 2018,the year ended December 31, 2021, which consisted of $354.2 million consideration paid for our 2021 acquisitions, net of cash acquired, capital expenditures of $23.7$29.0 million for property and equipment, and $30.7$29.4 million for costs of software development for external use.
Net cash used in investing activities was $35.0$279.9 million for 2017,the year ended December 31, 2020, which consisted of $225.0 million consideration paid for the acquisition of the 340B Link Business, capital expenditures of $15.3$22.8 million for property and equipment, $15.0and $32.0 million for costs of software development for external use, $0.2 million for purchase of intangible assets, and $4.4 million attributable to the acquisition of InPharmics.use.
Financing Activities
Net cash used in investing activities was $341.3 million for 2016, $312.2 million of which was attributable to the acquisitions of Aesynt and Ateb. Capital expenditures related to software development costs for external use, purchases of property and equipment and, purchases of intangibles contributed $14.3 million, $13.4 million, and $1.4 million, respectively.
Net cash provided by $30.6financing activities was $456.3 million for the year ended December 31, 2020, primarily due to proceeds of $559.7 million from the issuance of the Notes, net of issuance costs, proceeds of approximately $51.3 million from the sale of warrants in connection with the issuance of the Notes, $150.0 million of proceeds under the Revolving Credit Facility, $54.3 million in proceeds from employee stock option exercises and employee stock planESPP purchases, and $39.6a net increase in the customer funds balances of $4.0 million, proceeds from salespartially offset by repayments of $200.0 million under the Revolving Credit Facility, $100.6 million for the purchase of the convertible note hedge in connection with the issuance of the Notes, $53.0 million for repurchases of our common stock, under the Distribution Agreement.
54
Contractual Obligations
Contractual obligations as of December 31, 20182021 were as follows:
| Payments Due By Period | ||||||||||||||||||||||||||||||||||||||||||||||||
| Payments Due by Period | Total | 2022 | 2023 - 2024 | 2025 - 2026 | 2027 and thereafter | |||||||||||||||||||||||||||||||||||||||||||
| Total | 2019 | 2020-2021 | 2022-2023 | 2024 and thereafter | ||||||||||||||||||||||||||||||||||||||||||||
| (In thousands) | (In thousands) | |||||||||||||||||||||||||||||||||||||||||||||||
Operating leases (1) | $ | 87,418 | $ | 14,153 | $ | 25,833 | $ | 20,143 | $ | 27,289 | Operating leases (1) | $ | 61,263 | $ | 15,434 | $ | 21,590 | $ | 13,356 | $ | 10,883 | |||||||||||||||||||||||||||
Purchase obligations (2) | 52,183 | 50,185 | 1,225 | 764 | 9 | Purchase obligations (2) | 170,147 | 158,465 | 11,612 | 41 | 29 | |||||||||||||||||||||||||||||||||||||
Term loan facility (3) | 140,000 | — | 140,000 | — | — | |||||||||||||||||||||||||||||||||||||||||||
Total (4) (5) | $ | 279,601 | $ | 64,338 | $ | 167,058 | $ | 20,907 | $ | 27,298 | ||||||||||||||||||||||||||||||||||||||
Convertible senior notes (3) | Convertible senior notes (3) | 580,750 | 1,437 | 2,875 | 576,438 | — | ||||||||||||||||||||||||||||||||||||||||||
Other (4) | Other (4) | 871 | 183 | 440 | 248 | — | ||||||||||||||||||||||||||||||||||||||||||
Total (5) | Total (5) | $ | 813,031 | $ | 175,519 | $ | 36,517 | $ | 590,083 | $ | 10,912 | |||||||||||||||||||||||||||||||||||||
(1)Commitments |
(2)We purchase components from a variety of 1934,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 amended,indicated in the table above. Refer to Note 10, Convertible Senior Notes, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.
(4)Other commitments include various finance leases and other financing arrangements.
(5)Refer to Note 13, Commitments and Contingencies, of the instructions thereto.Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks related to fluctuations in foreign currency exchange rates and interest rates.
Foreign Currency Exchange Risk
We operate in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which are the British Pound and the Euro. In order to manage foreign currency risk, at times we enter into foreign exchange forward contracts to mitigate risks associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities of our foreign subsidiaries. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We do not enter into derivative contracts for trading purposes. AtAs of December 31, 2018,2021, 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 December 31, 2018, we had total debt2021, there was no outstanding balance under the A&R Credit Agreement, and the net carrying amount under our convertible senior notes was $488.2 million. Although our convertible senior notes are based on a fixed rate, changes in interest rates could impact the fair value of $140.0 million. Seesuch notes. As of December 31, 2021, the fair market value of our convertible senior notes was $1.085 billion. Refer to Note 8, Debt5, Fair Value of Financial Instruments, and Credit AgreementsNote 10, Convertible Senior Notes, of the Notes to the Condensed Consolidated Financial Statements included in this annual report.Annual Report on Form 10-K for additional information.
We usehave used interest rate swap agreements to protect ourselves 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 arewere designated as cash flow hedges, involveinvolved 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
55
speculative trading purposes. During 2016,As of December 31, 2021, we entered into andid not have any outstanding interest rate swap agreements. Our interest rate swap agreement with a combined notional amountmatured during the second quarter of $100.0 million with one counterparty that became effective beginning on June 30, 2016 and matures on April 30, 2019. At December 31, 2018, the total debt under the Facilities exposed to interest rate fluctuation risk was $40.0 million. An immediate increase of 1% in interest rate would result in $0.4 million of interest expense per year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following tables presenting our quarterly resultsReport of operations should be read in conjunction with theIndependent Auditors and Consolidated Financial Statements and related disclosuresare included in Part IV, Item 15 of this annual reportAnnual Report on Form 10-K beginning on page F-1 and are incorporated herein by reference into this Item 8. We have prepared the unaudited information on the same basis as our audited consolidated financial statements. Our operating results for any quarter are not necessarily indicative of results for any future quarters or for a full year.reference.
| Quarter Ended | |||||||||||||||
December 31, 2018 (1) | September 30, 2018 | June 30, 2018 | March 31, 2018 | ||||||||||||
| (In thousands, except per share data) | |||||||||||||||
| 2018 Consolidated Statements of Operations Data | |||||||||||||||
| Total revenue | $ | 211,750 | $ | 204,267 | $ | 188,673 | $ | 182,619 | |||||||
| Gross profit | 102,183 | 98,909 | 88,783 | 82,455 | |||||||||||
| Income from operations | 18,930 | 17,495 | 7,334 | 633 | |||||||||||
| Net income | $ | 14,793 | $ | 13,628 | $ | 6,588 | $ | 2,720 | |||||||
| Net income per share: | |||||||||||||||
| Basic | $ | 0.37 | $ | 0.35 | $ | 0.17 | $ | 0.07 | |||||||
| Diluted | $ | 0.36 | $ | 0.33 | $ | 0.16 | $ | 0.07 | |||||||
| Quarter Ended | |||||||||||||||
| December 31, 2017 | September 30, 2017 | June 30, 2017 | March 31, 2017 | ||||||||||||
| (In thousands, except per share data) | |||||||||||||||
| 2017 Consolidated Statements of Operations Data | |||||||||||||||
| Total revenue | $ | 196,371 | $ | 186,748 | $ | 181,042 | $ | 148,553 | |||||||
| Gross profit | 93,495 | 84,819 | 78,132 | 62,191 | |||||||||||
| Income (loss) from operations | 16,201 | 12,197 | (701 | ) | (16,552 | ) | |||||||||
| Net income (loss) | $ | 31,225 | $ | 7,748 | $ | 1,880 | $ | (10,335 | ) | ||||||
| Net income (loss) per share: | |||||||||||||||
| Basic | $ | 0.82 | $ | 0.21 | $ | 0.05 | $ | (0.28 | ) | ||||||
| Diluted | $ | 0.79 | $ | 0.20 | $ | 0.05 | $ | (0.28 | ) | ||||||
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of December 31, 20182021 to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Control overOver Financial Reporting
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 U.S. generally accepted accounting principles. 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.
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 20182021 using the criteria for effective internal control over financial reporting as described in “Internal Control—Integrated Framework,” issued by the Committee of Sponsoring Organization of the Treadway Commission (2013 framework) (the COSO Criteria). Based on this assessment, management concluded that our internal control over financial reporting was effective as of December 31, 2018.2021.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued its attestation report on our internal control over financial reporting as of December 31, 2018,2021, which is included in Part IV, Item 15 of this annual report.Annual Report on Form 10-K.
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 year ended December 31, 2018.2021.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. ��DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS.
Not applicable.
56
PART III
Certain information required by Part III is omitted from this annual reportAnnual Report on Form 10-K because the registrant will file with the U.S.United States Securities and Exchange Commission a definitive proxy statement pursuant to Regulation 14A in connection with the solicitation of proxies for the Company’sOmnicell’s Annual Meeting of Stockholders expected to be held in May 20192022 (the “Proxy Statement”) not later than 120 days after the end of the fiscal year covered by this annual report,Annual Report on Form 10-K, and certain information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to directors and executive officers may be found under the heading “Executive Officers of the Registrant”“Information About Our Executive Officers” in Part I, Item 1 of this annual report,Annual Report on Form 10-K, and in the sections entitled “Board and Corporate Governance Matters—Election of Directors” and “Board and Corporate Governance Matters—Information about our Directors and Nominees” appearing in the Proxy Statement. Such information is incorporated herein by reference.
The information required by this Item with respect to our audit committee and audit committee financial expert may be found in the section entitled “Board and Corporate Governance Matters—Information Regarding Committees of the Board of Directors—Audit Committee” appearing in the Proxy Statement. Such information is incorporated herein by reference.
The information required by this Item with respect to compliance with Section 16(a) of the Securities Exchange Act of 1934 may be found in the sections entitled “Stock Ownership—“Delinquent Section 16(a) Beneficial Ownership Reporting Compliance”Reports” appearing in the Proxy Statement. Such information is incorporated herein by reference.
Our written Code of Conduct applies to all of our directors and employees, including executive officers, including without limitation our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Conduct is available on our investor relations website is located at www.omnicell.comir.omnicell.com under the hyperlink titled “Corporate Governance.entitled “Leadership & Governance—Governance Documents.” Changes to or waivers of the Code of Conduct will be disclosed on the same website. We intend to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding any amendment to, or waiver of, any provision of the Code of Conduct by disclosing such information on the same website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item with respect to director and executive officer compensation is incorporated by reference to the sections of our Proxy Statement entitled “Executive Compensation” and “Board and Corporate Governance Matters—Director Compensation.”
The information required by this Item with respect to Compensation Committee interlocks and insider participation is incorporated herein by reference to the section of our Proxy Statement entitled “Board and Corporate Governance Matters—Information Regarding Committees of the Board of Directors—Compensation Committee—Compensation Committee Interlocks and Insider Participation.”
The information required by this Item with respect to our Compensation Committee’s review and discussion of the Compensation Discussion and Analysis included in the Proxy Statement is incorporated herein by reference to the section of our Proxy Statement entitled “Executive Compensation—Compensation Committee Report.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item with respect to security ownership of certain beneficial owners and management is incorporated herein by reference to the section of our Proxy Statement entitled “Stock Ownership—Security Ownership of Certain Beneficial Owners and Management.”
The information required by this Item with respect to securities authorized for issuance under our equity compensation plans is incorporated herein by reference to the section of our Proxy Statement entitled “Equity Plan Information—Equity Compensation Plan Information.”
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required by this Item with respect to related party transactions is incorporated herein by reference to the section of our Proxy Statement entitled “Board and Corporate Governance Matters—Certain Relationships and Related Transactions.”
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The information required by this Item with respect to director independence is incorporated herein by reference to the section of our Proxy Statement entitled “Board and Corporate Governance Matters—Independence of the Board of Directors.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item is incorporated herein by reference to the section of our Proxy Statement entitled “Audit Matters—Ratification of Selection of Independent Registered Public Accounting Firm—Principal Accountant Fees and Services.”
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PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
The following documents are included as part of this annual report:Annual Report on Form 10-K:
(1) Consolidated Financial Statements:
Change in Accounting PrinciplesAs discussed in Note 1 to the financial statements, the Company has changed its method of accounting for revenue in fiscal year 2018 due to the adoption of ASC Topic 606, Revenue from Contracts with Customers.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
25, 2022
OMNICELL, INC.CONSOLIDATED STATEMENTS OF OPERATIONS
PrinciplesBasis of ConsolidationPresentationCertain prior-year amounts have been adjusted to conform with the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, which became effective for the Company beginning on January 1, 2018. Refer to “Recently Adopted Authoritative Guidance” for the effects of adoption of ASC 606 and the section below for the updated revenue recognition policy.Certain prior-year amounts have been reclassified to conform with current-period presentation. These reclassifications include (i) reclassification of revenues from services and other revenues to product revenues of $0.8 million for the year ended December 31, 2017 related to software term-license sales, (ii) a change in inventories presentation related to allocation of inventories obsolescence reserve between finished goods, raw materials, and work in progress in Note 5, Balance Sheet Components. of the Notes to the Consolidated Financial Statements, and (iii) a change in intangible assets presentation related to presenting foreign currency impact separately in Note 7, Goodwill and Intangible Assets, of the Notes to the Consolidated Financial Statements. These changes were not deemed material and were included to conform with current-period classification and presentation.During 2018, the Company recorded out-of-period adjustments to correct errors originating in previous periods, which resulted in the increase of income before taxes of $3.2 million and net income of $2.5 million for the year ended December 31, 2018. Included in the out-of-period adjustments is a $2.6 million decrease in selling, general, and administrative expenses to correct purchase price accounting and integration activity for businesses acquired prior to 2018 along with other miscellaneous adjustments. The adjustments were not considered material to the fiscal year ended December 31, 2018 or any previously issued interim or annual consolidated financial statements.
As of December 31, 2021, 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.
Products.Connected devices, software licenses, and other. Software-enabled equipmentconnected devices and software licenses that managesmanage and regulatesregulate the storage and dispensing of pharmaceuticals, consumableconsumables blister cards, and packaging equipment and other medical 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, and IV compounding automation solutions.Software. Additional software applications that enable incremental functionality of the Company’s equipment orTechnical services.Installation. Installation of equipment as integrated systems at customer sites.ProfessionalConsumables. 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.
The Company often enters into change orders which modify the product to be received by the customer pursuant to certain contracts. Changes to any contract are accounted for as a modification of the existing contract to the extent the goods and services to be delivered as part of the contract are generally consistent with the nature and type of those to be provided under the terms of the original contract. Examples of such change orders include the addition or removal of units of equipment or changes to the configuration of the equipment where the overall nature of the contract remains intact. The Company’s change orders generally result in the change being accounted for as modifications of existing contracts given the nature of the impacted orders.
A portion of the Company's sales are made through multi-year lease agreements. Under sales-type leases, the Company recognizes revenue for its hardware and software products net of lease execution costs, such as post-installation product maintenance and technical support, at the net present value of the lease payment stream once its installation obligations have been met. The Company optimizes cash flows by selling a majority of its non-U.S. government 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. Some of the Company's sales-type leases, mostly those relating to U.S. government hospitals which comprise approximately 49% of the lease receivable balance, are retained in-house. Revenues from sales-type leases of $39.2 million, $29.6 million, and $34.9 million for the years ended December 31, 2018, December 31, 2017, and December 31, 2016 respectively, are included in product revenues in the Consolidated Statements of Operations. Interest income in these leases is recognized in product revenues using the effective interest method.The following table reflects the Company’s contract assets and contract liabilities:
Cash and Cash Equivalents and Fair Value of Financial Instruments.The Company classifies investments as cash equivalents if their original or remaining contractual maturity is three months or less at the date of purchase. Cash equivalents are carried at amounts that approximate fair value due to the short period of time to maturity. The Company’s cash balances are maintained in demand deposit accounts with financial institutions of high credit quality. The Company continuously monitors the credit worthiness of the financial institutions in which it invests. The Company has not experienced any credit losses from its cash investments.Foreign currency forward contracts. The Company enters into foreign currency forward contracts to protect its business from the risk that exchange rates may affect the eventual cash flows resulting from intercompany transactions between Omnicell and its foreign subsidiaries. These transactions primarily arise as a result of products manufactured in the United States and sold to foreign subsidiaries in U.S. dollars rather than the subsidiaries’ functional currencies. These forward contracts are considered to be financial derivative instruments and are recorded at fair value. Changes in fair values of these financial derivative instruments are either recognized in other comprehensive income or net income depending on whether the derivative has been designated and qualifies as a hedging instrument. At December 31, 2018 and December 31, 2017, the Company had no outstanding foreign exchange forward contracts.Interest rate swap agreements. During 2016, the Company entered into anCompany's interest rate swap agreement. The interest rate swap agreement, at its inception, qualified for and were designatedagreements qualify as cash flow hedging instrument. Ininstruments in accordance with the ASC 815, Derivatives and Hedging topic of the Accounting Standards Codification, the. The Company records its interest rate swapsswap agreements on its consolidated balance sheetConsolidated Balance Sheets at fair value. The effective portion of changes in fair value are recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion is recognized in earnings. On a quarterly basis, the Company performs a qualitative assessment to determine effectiveness. For further information regarding these interest rate swap agreements, please referRefer to Note 4, Cash and Cash Equivalents and 5, Fair Value of Financial Instruments.Debt. The Company has entered into a Credit Agreement which providesInstruments, for (a) a five-year revolving credit facility and (b) a five-year term loan facility (“Facilities”). The amount borrowed under these facilities is recorded at its carrying value at December 31, 2018. The fair value of debt at December 31, 2018 approximates the carrying value.Allowance for Doubtful Accounts and Notes Receivables from Investment in Sales-Type LeasesThe Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. The Company records a specific allowance based on an analysis of individual past-due balances. Additionally, based on historical write-offs and the Company’s collection experience, the Company records an additional allowance based on a percentage of outstanding receivables. The Company performs credit evaluations of its customers’ financial condition. These evaluations require significant judgment and are based on a variety of factors including, but not limited to, current economic trends, payment history and a financial review of the customer. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company’s financial position and results of operations.There were no customers that accounted for more than 10% of the Company’s accounts receivable balance asinformation. As of December 31, 2018 and December 31, 2017.2021, the Company did not have any outstanding interest rate swap agreements.
The retained in-house leases discussed above are considered financing receivables. The Company’s credit policies and its evaluationSales of Accounts ReceivableThe Company records the sale of its accounts receivables as in accordance with accounting guidance for transfers and servicing of financial assets. The Company transferred non-recourse accounts receivable totaling $46.6 million, $40.0 million, and $28.7 million during fiscal years 2018, 2017, and 2016, respectively, which approximated fair value, to leasing companies on a non-recourse basis. Accounts receivable balance included approximately $10.6 million, $0.1 million, and $0.2 million due from third-party leasing companies for transferred non-recourse accounts receivable as of December 31, 2018, December 31, 2017, and December 31, 2016, respectively.
Depreciation and amortization of property and equipment was $15.1 million, $16.2 million, and $15.0 million for the years ended December 31, 2018, December 31, 2017, and December 31, 2016, respectively.
Goodwill. Goodwill
Shipping CostsOutbound freight billed to customers is recorded as product revenue. The related shipping and handling costs are expensed as part of selling, general, and administrative expense. Shipping and handling expenses were $14.1 million,
$13.6 million, and $12.1 million for the years ended December 31, 2018, December 31, 2017, and December 31, 2016, respectively.Under the ASC 606 guidance, fees paid to GPOs are now presented as2021 on a reduction of product revenues, whereas these fees were considered a part of selling, general, and administrative costs under the previous guidance.prospective basis. The majority of the incremental costs incurred to obtain a contract, primarily commission expense, are recognized during the first year with the balance recognized ratably over a period of ten years. Additionally, revenue on term software licenses is recognized upon installation of the license rather than ratably over the life of the term license. Finally, the Company no longer defers the contingent revenue in transactions where the amount charged to the customer for a particular performance obligation is less than the allocation of standalone selling price.Adoption of the standard related to revenue recognition impacted the Company’s reported results as follows:
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company early adopted this guidance effective beginning July 1, 2018. The application of this guidance did not have a material effectimpact on the Company’s consolidated financial statements.Consolidated Financial Statements.
The Company’s adoption of the new standard is estimated to result in the recognition of right-of-use assets and offsetting lease liabilities for operating leases on the Consolidated Balance Sheets of approximately $66.0 million and $70.0 million, respectively, as of January 1, 2019. The difference between the right-of-use assets and lease liabilities is primarily due to the existing deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which was effectively reclassified upon adoption to reduce the measurement of the right-of-use assets. Adoption of the standard is not expected to have an impact on the Company’s stockholders’ equity, and is not expected to materially impact the Consolidated Statements of Operations and Consolidated Statements of Cash Flows.In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits the reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. These amounts are commonly referred to as “stranded tax effects.” ASU 2018-02 will be effective for the Company beginning January 1, 2019. The Company does not expect application of this guidance to have a material effect on its consolidated financial statements.In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective for the Company beginning January 1, 2020.permitted. The Company is currently evaluating the impact ASU 2018-152021-08 will have on its consolidated financial statements.Consolidated Financial Statements.
2017 AcquisitionsOn April 12, 2017, the Company completed the acquisition of all of the membership interest of Dixie Drawl, LLC d/b/a InPharmics (“InPharmics”). InPharmics is a technology and services company that provides advanced pharmacy informatics solutions to hospital pharmacies. The total consideration for the transaction was $5.0 million, net of cash acquired of $0.3 million. Approximately $0.5 million of the total consideration was classified as a long-term liability for potential settlement of performance obligations. The Company accounted for the acquisition of InPharmicsits acquisitions in accordance with the authoritative guidance on business combinations; therefore, theASC 805, Business Combinations. The tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the respective acquisition date. The purchase price was allocated to intangibledates. Intangible assets eligible for recognition separate from goodwill were those that satisfied either the contractual or legal criterion or the separability criterion in the amount of $1.9 million,accounting guidance. The preliminary fair values assume management’s best estimates based on information available at the respective acquisition date and may change over the measurement period, which included developed technology and customer contracts, withwill end no later than one year from the remainder allocated to goodwill. The results of the InPharmics’ operations have been included in the consolidated results of operations, and presentedrespective acquisition date, as part of the Automation and Analytics segment.2016 AcquisitionsOn January 5, 2016, the Company completed the acquisition of all of the membership interests of Aesynt. Aesyntadditional information is a provider of automated medication management systems, including dispensing robots with storage solutions, medication storage and dispensing carts and cabinets, I.V. sterile preparation robotics and software, including software related to medication management. The total consideration was $271.5 million, net of cash acquired of $8.2 million. The results of Aesynt’s operations have been included in the consolidated results of operations as of the time of the acquisition, and presented as part of the Automation and Analytics segment.On December 8, 2016, the Company completed its acquisition of ateb, Inc., and Ateb Canada Ltd. (together, “Ateb”) for $40.7 million of cash consideration, net of $0.9 million cash on hand. The cash consideration, included the repayment of Ateb indebtedness and other adjustments provided for in the Ateb’s Securities Purchase Agreement. Ateb is a provider of pharmacy-based patient care and medication synchronization solutions to independent and chain pharmacies. The results of Ateb’s operations have been included in the consolidated results of operations as of the time of the acquisition, and presented as part of the Medication Adherence segment.
Cash and cash equivalents of $67.2 million and $32.4 million as of December 31, 2018 and December 31, 2017, respectively, consisted of demand deposits only.
The following table represents the fair value hierarchy$488.2 million and $467.2 million, respectively, which are net of unamortized discount and debt issuance costs and excludes amounts classified within additional paid-in capital. Refer to Note 9, Debt and Credit Agreements, for further information regarding the Company’s financial assets measured at fair value as of December 31, 2017:
There have been no transfers between fair value measurement levels duringcredit facility and Note 10, Convertible Senior Notes, for further information regarding the years ended December 31, 2018 and December 31, 2017.
Company’s convertible senior notes.The Company uses interest rate swap agreements to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company’s interest rate swaps, which are designated as cash flow hedges, involve the receipt of variable amounts from counterparties in exchange for the Company making fixed-rate payments over the life of the agreements. The Company does not hold or issue any derivative financial instruments for speculative trading purposes.
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(2) Exhibits: The information required by this item is set forth on the exhibit index which precedes the signature page of this Annual Report on Form 10-K. ITEM 16. FORM 10-K SUMMARY None. 59 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholdersstockholders and the Board of Directors of Omnicell, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Omnicell, Inc. and subsidiaries (the "Company"“Company”) as of December 31, 20182021 and 2017,2020, the related consolidated statements of operations,comprehensive income, shareholders'stockholders’ equity, and cash flows, for each of the three years in the period ended December 31, 2018,2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018,2021, in conformity with accounting principles generally accepted in the United States of America.America (U.S. GAAP).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sCompany’s internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 27, 2019,25, 2022, expressed an unqualified opinion on the Company'sCompany’s internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Inventory Valuation — Refer to Note 1 to the financial statements
Critical Audit Matter Description
The Company records write-downs for excess and slow-moving inventory based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These estimates require management judgment and are impacted by market and economic conditions, technology changes, and new product introductions. The Company’s consolidated inventory balance is $119.9 million as of December 31, 2021.
We identified the inventory valuation as a critical audit matter because of the assumptions and judgments made by management to estimate the excess and slow-moving inventory, especially considering the presence of various inventory types and evolving product life cycles, which includes new product development. The analysis of inventory valuation required a high degree of auditor judgment when performing audit procedures to evaluate qualitative and quantitative factors considered and the reasonableness of the relevant management judgments.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures over the inventory valuation included the following, among others:
F-1
• We tested the effectiveness of controls over inventory for valuation.
• We evaluated the appropriateness of management’s method, assumptions, and judgments used in developing their estimate of the excess and slow-moving inventory, which included consideration of demand for its products, potential obsolescence of technology, product life cycles, and pricing trends.
• We tested certain underlying data used and considered in the excess and obsolete inventory assessment, including the amount of inventory on hand, forecasted demand, and historical sales.
• We compared actual inventory usage and write-off activity in the current year to the excess and obsolete estimate by management in the prior year to evaluate management’s ability to make accurate estimates.
• We evaluated the valuation of excess and obsolete inventory for understatement by making selections of individual inventory items and evaluating the appropriateness of the inventory valuation and management judgments based on relevant product specific information. These procedures also included certain inquiries of production planning and supply chain employees.
• We evaluated whether the excess and obsolete inventory may be understated by evaluating write-off activity of inventory subsequent to December 31, 2021.
Capitalized Software - Software Development Costs for External Use — Refer to Notes 1 and 6 to the financial statements
Critical Audit Matter Description
The Company capitalizes certain costs for software that is to be sold, leased or otherwise marketed once technological feasibility has been established and amortizes these costs over the estimated lives of the related products. The determination of whether a project’s software development costs are capitalized or expensed could have a significant impact on the financial statements. The Company capitalized $29.4 million of software development costs in the year ended December 31, 2021 and had total external capitalized software development costs, net of accumulated amortization, of $97.0 million as of December 31, 2021.
We identified management’s determination of capitalized software development costs to be a critical audit matter. Evaluating the Company’s determination of the project and related software development activities to be capitalized under relevant accounting guidance, including the extent to which software development costs incurred were capitalized, required subjective auditor judgment.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures to assess the appropriateness of capitalized software development costs included the following, among others:
• We tested the effectiveness of management’s capitalized software development cost controls.
• We obtained an understanding of management’s process for evaluating software development costs and the nature of software development costs capitalized.
• We tested management’s method of calculating capitalized software development costs. For a sample of projects, we performed audit procedures to agree capitalized labor costs to time records and made certain inquiries of project members to further assess the reasonableness of time allocated to the selected projects.
• For a sample of software development projects, we obtained an understanding of the new software enhancements and features planned for development by reviewing management’s project documentation and inquiring of project managers and engineers.
• For a sample of software development projects, we tested the timing of software development cost recognition as either a capitalized or an expensed development cost, depending which stage of project development the cost was incurred. We also inquired of project managers and engineers regarding the date technological feasibility was reached and observed the new features developed in the working model.
F-2
Business Acquisitions - Valuation of Customer Relationship Intangible Assets — Refer to Note 1 and 2 to the financial statements
Critical Audit Matter Description
The Company completed the acquisitions of RxInnovation Inc., operating as FDS Amplicare, ReCept Holdings, Inc., and MarkeTouch Media, LLC (“Acquired Companies”) for consideration of $178.5 million, $102.5 million, and $82.6 million on September 9, 2021, December 29, 2021, and December 31, 2021, respectively. The Company accounted for the acquisitions of the Acquired Companies under the acquisition method. Accordingly, the purchase price paid for assets acquired and liabilities assumed was allocated, based on relative fair value, to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values. The Company estimated the fair value of Acquired Companies' identifiable intangible assets to be $136.1 million, including $122.1 million related to customer relationships.
There was a high degree of auditor judgment and subjectivity in applying audit procedures relating to the fair value measurement of intangible assets acquired, specifically the customer relationships, and the fair value of the customer relationship intangible assets acquired was estimated by management through a discounted cash flow model using the multi-period excess earnings method, which involved the use of significant estimates and assumptions related to revenue growth rates and other forecasted financial information, discount rates, and customer attrition rates, among certain other assumptions. The audit effort involved the use of professionals with specialized skill and knowledge to assist in evaluating the audit evidence obtained from these procedures.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the management’s estimates of the fair value of the customer relationships intangible assets included the following, among others:
• We tested the effectiveness of internal controls over business combinations including (i) the controls over the valuation of the acquired intangible assets and (ii) controls over the forecasted financial information including assumptions of revenue growth rates and forecasted financial information, discount rates, and customer attrition rates selected by management.
• With the assistance of our fair value specialists, we evaluated the reasonableness of the (1) valuation methodologies used and (2) discount rates, including testing the underlying source information, testing the mathematical accuracy of the calculations, and developing a range of independent estimates and comparing those to the discount rates selected by management.
•Compared the customer attrition rate to an independently developed estimate and for a sample of underlying data, agreed information to historical records of the Acquired Companies.
• We evaluated the reasonableness of management’s forecasts of revenue growth rates, gross margin and operating income before taxes by comparing to:
◦Historical forecasting accuracy for previously acquired companies.
◦Analyst reports for the Company and the Acquired Companies, as well as industry reports, and comparison of historical rates to companies in the peer group.
◦Inquiries with appropriate individuals within the Company and Acquired Companies’ operations, engineering, and finance departments regarding the forecasts of revenue growth rates, gross margin and operating income before taxes.
• We evaluated whether the audit evidence obtained through these procedures was consistent with evidence obtained in other areas of the audit.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
San Jose, California
February 27, 2019
25, 2022
We have served as the Company’s auditor since 2014.
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholdersstockholders and the Board of Directors of Omnicell, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Omnicell, Inc. and subsidiaries (the “Company”) as of December 31, 2018,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2018,2021, based on criteria established in Internal Control -— Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018,2021, of the Company and our report dated February 27, 2019,25, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTEDeloitte & TOUCHETouche LLP
San Jose, California
February 27, 201925, 2022
F-4
OMNICELL, INC.
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
| December 31, | |||||||
| 2018 | 2017 | ||||||
| (In thousands, except par value) | |||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 67,192 | $ | 32,424 | |||
| Accounts receivable and unbilled receivables, net of allowances of $2,582 and $5,738, respectively | 196,238 | 190,046 | |||||
| Inventories | 100,868 | 96,137 | |||||
| Prepaid expenses | 20,700 | 20,392 | |||||
| Other current assets | 12,136 | 13,273 | |||||
| Total current assets | 397,134 | 352,272 | |||||
| Property and equipment, net | 51,500 | 42,595 | |||||
| Long-term investment in sales-type leases, net | 17,082 | 15,435 | |||||
| Goodwill | 335,887 | 337,751 | |||||
| Intangible assets, net | 143,686 | 168,107 | |||||
| Long-term deferred tax assets | 15,197 | 9,454 | |||||
| Prepaid commissions | 46,143 | 41,432 | |||||
| Other long-term assets | 74,613 | 49,316 | |||||
| Total assets | $ | 1,081,242 | $ | 1,016,362 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 38,038 | $ | 48,290 | |||
| Accrued compensation | 41,660 | 27,241 | |||||
| Accrued liabilities | 43,047 | 35,693 | |||||
| Long-term debt, current portion, net | — | 15,208 | |||||
| Deferred revenues, net | 81,835 | 78,774 | |||||
| Total current liabilities | 204,580 | 205,206 | |||||
| Long-term deferred revenues | 10,582 | 10,623 | |||||
| Long-term deferred tax liabilities | 41,484 | 41,446 | |||||
| Other long-term liabilities | 9,562 | 9,829 | |||||
| Long-term debt, net | 135,417 | 194,917 | |||||
| Total liabilities | 401,625 | 462,021 | |||||
| Commitments and contingencies (Note 10) | |||||||
| 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; 49,480 and 47,577 shares issued; 40,335 and 38,432 shares outstanding, respectively | 50 | 48 | |||||
| Treasury stock at cost, 9,145 shares outstanding, respectively | (185,074 | ) | (185,074 | ) | |||
| Additional paid-in capital | 678,041 | 585,755 | |||||
| Retained earnings | 197,454 | 159,725 | |||||
| Accumulated other comprehensive loss | (10,854 | ) | (6,113 | ) | |||
| Total stockholders’ equity | 679,617 | 554,341 | |||||
| Total liabilities and stockholders’ equity | $ | 1,081,242 | $ | 1,016,362 | |||
| Year Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (In thousands, except per share data) | |||||||||||
| Revenues: | |||||||||||
| Product revenues | $ | 569,595 | $ | 510,201 | $ | 527,727 | |||||
| Services and other revenues | 217,714 | 202,513 | 168,181 | ||||||||
| Total revenues | 787,309 | 712,714 | 695,908 | ||||||||
| Cost of revenues: | |||||||||||
| Cost of product revenues | 312,360 | 304,842 | 302,437 | ||||||||
| Cost of services and other revenues | 102,619 | 89,235 | 76,386 | ||||||||
| Total cost of revenues | 414,979 | 394,077 | 378,823 | ||||||||
| Gross profit | 372,330 | 318,637 | 317,085 | ||||||||
| Operating expenses: | |||||||||||
| Research and development | 64,843 | 66,022 | 57,799 | ||||||||
| Selling, general, and administrative | 263,095 | 241,470 | 237,881 | ||||||||
| Total operating expenses | 327,938 | 307,492 | 295,680 | ||||||||
| Income from operations | 44,392 | 11,145 | 21,405 | ||||||||
| Interest and other income (expense), net | (8,776 | ) | (6,633 | ) | (8,429 | ) | |||||
| Income before provision for income taxes | 35,616 | 4,512 | 12,976 | ||||||||
| Provision for (benefit from) income taxes | (2,113 | ) | (26,006 | ) | 3,220 | ||||||
| Net income | $ | 37,729 | $ | 30,518 | $ | 9,756 | |||||
| Net income per share: | |||||||||||
| Basic | $ | 0.96 | $ | 0.81 | $ | 0.27 | |||||
| Diluted | $ | 0.93 | $ | 0.79 | $ | 0.26 | |||||
| Weighted-average shares outstanding: | |||||||||||
| Basic | 39,242 | 37,483 | 36,156 | ||||||||
| Diluted | 40,559 | 38,712 | 36,864 | ||||||||
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands, except par value) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 349,051 | $ | 485,928 | |||||||
| Accounts receivable and unbilled receivables, net of allowances of $5,272 and $4,286, respectively | 240,894 | 190,117 | |||||||||
| Inventories | 119,924 | 96,298 | |||||||||
| Prepaid expenses | 22,499 | 16,027 | |||||||||
| Other current assets | 48,334 | 41,044 | |||||||||
| Total current assets | 780,702 | 829,414 | |||||||||
| Property and equipment, net | 71,141 | 59,073 | |||||||||
| Long-term investment in sales-type leases, net | 18,391 | 22,156 | |||||||||
| Operating lease right-of-use assets | 48,549 | 55,114 | |||||||||
| Goodwill | 738,900 | 499,309 | |||||||||
| Intangible assets, net | 277,616 | 168,211 | |||||||||
| Long-term deferred tax assets | 15,883 | 15,019 | |||||||||
| Prepaid commissions | 63,795 | 56,919 | |||||||||
| Other long-term assets | 127,519 | 119,289 | |||||||||
| Total assets | $ | 2,142,496 | $ | 1,824,504 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 71,513 | $ | 40,309 | |||||||
| Accrued compensation | 71,130 | 55,750 | |||||||||
| Accrued liabilities | 133,167 | 80,311 | |||||||||
| Deferred revenues, net | 112,196 | 100,053 | |||||||||
| Convertible senior notes, net | 488,152 | — | |||||||||
| Total current liabilities | 876,158 | 276,423 | |||||||||
| Long-term deferred revenues | 20,194 | 5,673 | |||||||||
| Long-term deferred tax liabilities | 51,705 | 39,633 | |||||||||
| Long-term operating lease liabilities | 39,911 | 48,897 | |||||||||
| Other long-term liabilities | 7,839 | 19,174 | |||||||||
| Convertible senior notes, net | — | 467,201 | |||||||||
| Total liabilities | 995,807 | 857,001 | |||||||||
| Commitments and contingencies (Note 13) | 0 | 0 | |||||||||
| 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; 54,073 and 52,677 shares issued; 44,179 and 42,783 shares outstanding, respectively | 54 | 53 | |||||||||
| Treasury stock at cost, 9,894 shares outstanding, respectively | (238,109) | (238,109) | |||||||||
| Additional paid-in capital | 1,024,580 | 920,359 | |||||||||
| Retained earnings | 368,571 | 290,722 | |||||||||
| Accumulated other comprehensive loss | (8,407) | (5,522) | |||||||||
| Total stockholders’ equity | 1,146,689 | 967,503 | |||||||||
| Total liabilities and stockholders’ equity | $ | 2,142,496 | $ | 1,824,504 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.
F-5
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEOPERATIONS
| Year Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (In thousands) | |||||||||||
| Net income | $ | 37,729 | $ | 30,518 | $ | 9,756 | |||||
| Other comprehensive income (loss), net of reclassification adjustments: | |||||||||||
| Unrealized gain (loss) on interest rate swap contracts, net of tax | (421 | ) | (404 | ) | 1,245 | ||||||
| Foreign currency translation adjustments | (4,320 | ) | 3,810 | (8,034 | ) | ||||||
| Other comprehensive gain (loss) | (4,741 | ) | 3,406 | (6,789 | ) | ||||||
| Comprehensive income | $ | 32,988 | $ | 33,924 | $ | 2,967 | |||||
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||
| Revenues: | |||||||||||||||||
| Product revenues | $ | 812,512 | $ | 636,031 | $ | 659,602 | |||||||||||
| Services and other revenues | 319,506 | 256,177 | 237,425 | ||||||||||||||
| Total revenues | 1,132,018 | 892,208 | 897,027 | ||||||||||||||
| Cost of revenues: | |||||||||||||||||
| Cost of product revenues | 422,855 | 354,004 | 344,914 | ||||||||||||||
| Cost of services and other revenues | 154,510 | 124,912 | 115,201 | ||||||||||||||
| Total cost of revenues | 577,365 | 478,916 | 460,115 | ||||||||||||||
| Gross profit | 554,653 | 413,292 | 436,912 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | 75,716 | 70,161 | 68,644 | ||||||||||||||
| Selling, general, and administrative | 389,430 | 307,605 | 289,916 | ||||||||||||||
| Total operating expenses | 465,146 | 377,766 | 358,560 | ||||||||||||||
| Income from operations | 89,507 | 35,526 | 78,352 | ||||||||||||||
| Interest and other income (expense), net | (23,500) | (6,177) | (4,419) | ||||||||||||||
| Income before provision for income taxes | 66,007 | 29,349 | 73,933 | ||||||||||||||
| Provision for (benefit from) income taxes | (11,842) | (2,845) | 12,595 | ||||||||||||||
| Net income | $ | 77,849 | $ | 32,194 | $ | 61,338 | |||||||||||
| Net income per share: | |||||||||||||||||
| Basic | $ | 1.79 | $ | 0.76 | $ | 1.48 | |||||||||||
| Diluted | $ | 1.62 | $ | 0.74 | $ | 1.43 | |||||||||||
| Weighted-average shares outstanding: | |||||||||||||||||
| Basic | 43,475 | 42,583 | 41,462 | ||||||||||||||
| Diluted | 47,943 | 43,743 | 42,943 | ||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.
F-6
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITYCOMPREHENSIVE INCOME
| 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, 2015 | 44,739 | $ | 45 | (9,145 | ) | $ | (185,074 | ) | $ | 490,354 | $ | 117,869 | $ | (2,730 | ) | $ | 420,464 | ||||||||||||
| Net income | — | — | — | — | — | 9,756 | — | 9,756 | |||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (6,789 | ) | (6,789 | ) | |||||||||||||||||||
| Share-based compensation | — | — | — | — | 19,500 | — | — | 19,500 | |||||||||||||||||||||
| Issuance of common stock under employee stock plans | 1,039 | 1 | — | — | 17,691 | — | — | 17,692 | |||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (3,490 | ) | — | — | (3,490 | ) | |||||||||||||||||||
| Income tax benefits from employee stock plans | — | — | — | — | 1,703 | — | — | 1,703 | |||||||||||||||||||||
| Balances as of December 31, 2016 | 45,778 | 46 | (9,145 | ) | (185,074 | ) | 525,758 | 127,625 | (9,519 | ) | 458,836 | ||||||||||||||||||
| Net income | — | — | — | — | — | 30,518 | — | 30,518 | |||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 3,406 | 3,406 | |||||||||||||||||||||
| At the market equity offering, net of costs | 294 | — | — | — | 13,900 | — | — | 13,900 | |||||||||||||||||||||
| Share-based compensation | — | — | — | — | 21,857 | — | — | 21,857 | |||||||||||||||||||||
| Issuance of common stock under employee stock plans | 1,505 | 2 | — | — | 30,121 | — | — | 30,123 | |||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (5,892 | ) | — | — | (5,892 | ) | |||||||||||||||||||
| Cumulative effect of a change in accounting principle related to share-based compensation | — | — | — | — | — | 1,582 | — | 1,582 | |||||||||||||||||||||
| Income tax benefits from employee stock plans | — | — | — | — | 11 | — | — | 11 | |||||||||||||||||||||
| Balances as of December 31, 2017 | 47,577 | 48 | (9,145 | ) | (185,074 | ) | 585,755 | 159,725 | (6,113 | ) | 554,341 | ||||||||||||||||||
| Net income | — | — | — | — | — | 37,729 | — | 37,729 | |||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (4,741 | ) | (4,741 | ) | |||||||||||||||||||
| At the market equity offering, net of costs | 557 | 1 | — | — | 39,566 | — | — | 39,567 | |||||||||||||||||||||
| Share-based compensation | — | — | — | — | 28,885 | — | — | 28,885 | |||||||||||||||||||||
| Issuance of common stock under employee stock plans | 1,346 | 1 | — | — | 30,610 | — | — | 30,611 | |||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (6,775 | ) | — | — | (6,775 | ) | |||||||||||||||||||
| Balances as of December 31, 2018 | 49,480 | $ | 50 | (9,145 | ) | $ | (185,074 | ) | $ | 678,041 | $ | 197,454 | $ | (10,854 | ) | $ | 679,617 | ||||||||||||
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Net income | $ | 77,849 | $ | 32,194 | $ | 61,338 | |||||||||||
| Other comprehensive income (loss), net of reclassification adjustments: | |||||||||||||||||
| Unrealized loss on interest rate swap contracts, net of tax | — | — | (420) | ||||||||||||||
| Foreign currency translation adjustments | (2,885) | 3,924 | 1,828 | ||||||||||||||
| Other comprehensive income (loss) | (2,885) | 3,924 | 1,408 | ||||||||||||||
| Comprehensive income | $ | 74,964 | $ | 36,118 | $ | 62,746 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.
F-7
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSSTOCKHOLDERS’ EQUITY
| Year Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (In thousands) | |||||||||||
| Operating Activities | |||||||||||
| Net income | $ | 37,729 | $ | 30,518 | $ | 9,756 | |||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 51,350 | 51,511 | 58,362 | ||||||||
| Loss on disposal of fixed assets | 133 | 512 | 35 | ||||||||
| Gain related to contingent liability | — | — | (600 | ) | |||||||
| Share-based compensation expense | 28,885 | 21,857 | 19,500 | ||||||||
| Income tax benefits from employee stock plans | — | 11 | 1,703 | ||||||||
| Deferred income taxes | (5,705 | ) | (31,365 | ) | (5,111 | ) | |||||
| Amortization of debt financing fees | 2,292 | 1,590 | 1,590 | ||||||||
| Changes in operating assets and liabilities, net of business acquisitions: | |||||||||||
| Accounts receivable and unbilled receivables | (6,192 | ) | (40,598 | ) | 9,932 | ||||||
| Inventories | (6,763 | ) | (26,840 | ) | (3,362 | ) | |||||
| Prepaid expenses | (308 | ) | (4,920 | ) | (386 | ) | |||||
| Other current assets | 1,170 | (2,074 | ) | (1,093 | ) | ||||||
| Investment in sales-type leases | (1,680 | ) | 6,625 | (9,639 | ) | ||||||
| Prepaid commissions | (4,711 | ) | (3,966 | ) | (7,150 | ) | |||||
| Other long-term assets | (7,077 | ) | (1,373 | ) | (5,133 | ) | |||||
| Accounts payable | (9,154 | ) | 19,709 | (4,963 | ) | ||||||
| Accrued compensation | 14,419 | 519 | (2,052 | ) | |||||||
| Accrued liabilities | 8,223 | 4,383 | (3,287 | ) | |||||||
| Deferred revenues | 3,020 | (2,334 | ) | (1,938 | ) | ||||||
| Other long-term liabilities | (1,665 | ) | 1,069 | (6,264 | ) | ||||||
| Net cash provided by operating activities | 103,966 | 24,834 | 49,900 | ||||||||
| Investing Activities | |||||||||||
| Purchase of intangible assets, intellectual property, and patents | — | (160 | ) | (1,372 | ) | ||||||
| Software development for external use | (30,677 | ) | (15,040 | ) | (14,348 | ) | |||||
| Purchases of property and equipment | (23,697 | ) | (15,341 | ) | (13,445 | ) | |||||
| Business acquisitions, net of cash acquired | — | (4,446 | ) | (312,158 | ) | ||||||
| Net cash used in investing activities | (54,374 | ) | (34,987 | ) | (341,323 | ) | |||||
| Financing Activities | |||||||||||
| Proceeds from debt, net | — | 56,894 | 287,051 | ||||||||
| Repayment of debt and revolving credit facility | (77,000 | ) | (102,500 | ) | (34,500 | ) | |||||
| Payment for contingent consideration | — | (2,400 | ) | (3,000 | ) | ||||||
| Proceeds from issuances under share-based compensation plans | 30,611 | 30,121 | 17,691 | ||||||||
| Employees’ taxes paid related to restricted stock units | (6,775 | ) | (5,892 | ) | (3,490 | ) | |||||
| At the market offering, net of offering costs | 39,567 | 13,900 | — | ||||||||
| Net cash provided by (used in) financing activities | (13,597 | ) | (9,877 | ) | 263,752 | ||||||
| Effect of exchange rate changes on cash and cash equivalents | (1,227 | ) | (2,034 | ) | (58 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | 34,768 | (22,064 | ) | (27,729 | ) | ||||||
| Cash and cash equivalents at beginning of period | 32,424 | 54,488 | 82,217 | ||||||||
| Cash and cash equivalents at end of period | $ | 67,192 | $ | 32,424 | $ | 54,488 | |||||
| Supplemental cash flow information | |||||||||||
| Cash paid for interest | $ | 7,487 | $ | 6,550 | $ | 5,344 | |||||
| Cash paid for taxes, net of refunds | $ | 3,489 | $ | 7,780 | $ | 11,091 | |||||
| Supplemental disclosure of non-cash investing activities | |||||||||||
| Non-cash activity business acquisition | $ | — | $ | 3,400 | $ | — | |||||
| Unpaid property and equipment purchases | $ | 1,123 | $ | 1,691 | $ | 246 | |||||
| Transfers between inventory and property and equipment, net | $ | 2,032 | $ | — | $ | — | |||||
| 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, 2018 | 49,480 | $ | 50 | (9,145) | $ | (185,074) | $ | 678,041 | $ | 197,454 | $ | (10,854) | $ | 679,617 | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 61,338 | — | 61,338 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 1,408 | 1,408 | |||||||||||||||||||||||||||||||||||||||
| At the market equity offering, net of costs | 460 | — | — | — | 37,806 | — | — | 37,806 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | 34,049 | — | — | 34,049 | ||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 1,337 | 1 | — | — | 40,705 | — | — | 40,706 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (9,670) | — | — | (9,670) | |||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2019 | 51,277 | 51 | (9,145) | (185,074) | 780,931 | 258,792 | (9,446) | 845,254 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 32,194 | — | 32,194 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | — | 3,924 | 3,924 | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 44,697 | — | — | 44,697 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 1,400 | 2 | — | — | 54,268 | — | — | 54,270 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | (8,738) | — | — | (8,738) | ||||||||||||||||||||||||||||||||||||||||
| Stock repurchases | — | — | (749) | (53,035) | — | — | — | (53,035) | |||||||||||||||||||||||||||||||||||||||
| Equity component of convertible senior note issuance, net of issuance costs | — | — | — | — | 97,830 | — | — | 97,830 | |||||||||||||||||||||||||||||||||||||||
| Purchase of convertible note hedge | — | — | — | — | (100,625) | — | — | (100,625) | |||||||||||||||||||||||||||||||||||||||
| Sale of warrants | — | — | — | — | 51,290 | — | — | 51,290 | |||||||||||||||||||||||||||||||||||||||
| Tax benefits related to convertible senior notes and convertible note hedge | — | — | — | — | 706 | — | — | 706 | |||||||||||||||||||||||||||||||||||||||
| Cumulative effect of a change in accounting principle related to credit losses | — | — | — | — | — | (264) | — | (264) | |||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2020 | 52,677 | 53 | (9,894) | (238,109) | 920,359 | 290,722 | (5,522) | 967,503 | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | 77,849 | — | 77,849 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | — | (2,885) | (2,885) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | — | 53,160 | — | — | 53,160 | |||||||||||||||||||||||||||||||||||||||
| Issuance of common stock under employee stock plans | 1,396 | 1 | — | — | 67,347 | — | — | 67,348 | |||||||||||||||||||||||||||||||||||||||
| Tax payments related to restricted stock units | — | — | — | — | (16,286) | — | — | (16,286) | |||||||||||||||||||||||||||||||||||||||
| Balances as of December 31, 2021 | 54,073 | $ | 54 | (9,894) | $ | (238,109) | $ | 1,024,580 | $ | 368,571 | $ | (8,407) | $ | 1,146,689 | |||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.Consolidated Financial Statements.
F-8
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Operating Activities | |||||||||||||||||
| Net income | $ | 77,849 | $ | 32,194 | $ | 61,338 | |||||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||||
| Depreciation and amortization | 72,990 | 61,067 | 53,559 | ||||||||||||||
| Loss on disposal of property and equipment | 433 | 267 | 445 | ||||||||||||||
| Share-based compensation expense | 53,160 | 44,697 | 34,049 | ||||||||||||||
| Deferred income taxes | (3,272) | (6,546) | (1,339) | ||||||||||||||
| Amortization of operating lease right-of-use assets | 11,941 | 10,528 | 10,562 | ||||||||||||||
| Amortization of debt issuance costs | 3,440 | 1,597 | 2,204 | ||||||||||||||
| Amortization of discount on convertible senior notes | 18,608 | 4,766 | — | ||||||||||||||
| Changes in operating assets and liabilities: | |||||||||||||||||
| Accounts receivable and unbilled receivables | (40,973) | 36,842 | (21,540) | ||||||||||||||
| Inventories | (25,695) | 12,359 | (8,123) | ||||||||||||||
| Prepaid expenses | (5,678) | (2,081) | 2,909 | ||||||||||||||
| Other current assets | 2,801 | (6,408) | (2,010) | ||||||||||||||
| Investment in sales-type leases | 3,346 | (2,882) | (3,699) | ||||||||||||||
| Prepaid commissions | (6,876) | (8,057) | (2,719) | ||||||||||||||
| Other long-term assets | (3,258) | (7,675) | 4,528 | ||||||||||||||
| Accounts payable | 29,084 | (6,300) | 7,893 | ||||||||||||||
| Accrued compensation | 12,312 | 11,595 | 2,495 | ||||||||||||||
| Accrued liabilities | 34,859 | 4,374 | 3,045 | ||||||||||||||
| Deferred revenues | 24,179 | 7,620 | 5,445 | ||||||||||||||
| Operating lease liabilities | (12,503) | (9,543) | (10,040) | ||||||||||||||
| Other long-term liabilities | (14,938) | 7,456 | 6,006 | ||||||||||||||
| Net cash provided by operating activities | 231,809 | 185,870 | 145,008 | ||||||||||||||
| Investing Activities | |||||||||||||||||
| Software development for external use | (29,368) | (32,024) | (45,770) | ||||||||||||||
| Purchases of property and equipment | (28,967) | (22,842) | (15,894) | ||||||||||||||
| Business acquisitions, net of cash acquired | (354,163) | (225,000) | — | ||||||||||||||
| Net cash used in investing activities | (412,498) | (279,866) | (61,664) | ||||||||||||||
| Financing Activities | |||||||||||||||||
| Proceeds from revolving credit facility | — | 150,000 | — | ||||||||||||||
| Repayment of debt and revolving credit facility | — | (200,000) | (90,000) | ||||||||||||||
| Payments for debt issuance costs for revolving credit facility | — | (550) | (2,321) | ||||||||||||||
| Proceeds from issuance of convertible senior notes, net of issuance costs | — | 559,665 | — | ||||||||||||||
| Purchase of convertible note hedge | — | (100,625) | — | ||||||||||||||
| Proceeds from sale of warrants | — | 51,290 | — | ||||||||||||||
| At the market equity offering, net of offering costs | — | — | 37,806 | ||||||||||||||
| Proceeds from issuances under stock-based compensation plans | 67,348 | 54,270 | 40,706 | ||||||||||||||
| Employees’ taxes paid related to restricted stock units | (16,286) | (8,738) | (9,670) | ||||||||||||||
| Stock repurchases | — | (53,035) | — | ||||||||||||||
| Change in customer funds, net | (3,699) | 3,992 | — | ||||||||||||||
| Net cash provided by (used in) financing activities | 47,363 | 456,269 | (23,479) | ||||||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (974) | 437 | 153 | ||||||||||||||
| Net increase (decrease) in cash, cash equivalents, and restricted cash | (134,300) | 362,710 | 60,018 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at beginning of period | 489,920 | 127,210 | 67,192 | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 355,620 | $ | 489,920 | $ | 127,210 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-9
OMNICELL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash to the Consolidated Balance Sheets: | |||||||||||||||||
| Cash and cash equivalents | $ | 349,051 | $ | 485,928 | $ | 127,210 | |||||||||||
| Restricted cash included in Other current assets | 6,569 | 3,992 | — | ||||||||||||||
| Cash, cash equivalents, and restricted cash at end of period | $ | 355,620 | $ | 489,920 | $ | 127,210 | |||||||||||
| Supplemental cash flow information | |||||||||||||||||
| Cash paid for interest | $ | 1,917 | $ | 522 | $ | 3,582 | |||||||||||
| Income taxes paid (refunds received), net | $ | (1,733) | $ | 10,343 | $ | 7,761 | |||||||||||
| Supplemental disclosure of non-cash activities | |||||||||||||||||
| Unpaid purchases of property and equipment | $ | 883 | $ | 405 | $ | 913 | |||||||||||
| Transfers between inventory and property and equipment, net | $ | 1,876 | $ | — | $ | 1,552 | |||||||||||
| Transfers from prepaid expenses to property and equipment | $ | — | $ | — | $ | 3,313 | |||||||||||
| Balance transfer from term loan to revolving credit facility | $ | — | $ | — | $ | 80,000 | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-10
OMNICELL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 supply dispensing automation solutions, central pharmacy automation solutions, analytics software,adherence tools for healthcare systems and medication adherence solutionspharmacies, which are sold in its principal market, which is the healthcare industry. The Company’s market is primarily located in the United States and Europe. “Omnicell” or the “Company” collectively refer to Omnicell, Inc. and its subsidiaries.
The accompanying Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principlesGenerally Accepted Accounting Principles (“GAAP”) and include all adjustments necessary for the fair presentation of the Company’s consolidated financial position, results of operations, and cash flows for the periods presented.
Principles of Consolidation
The Consolidated Financial Statements include the Company’s accounts as well as those of the Company and its wholly owned subsidiaries after the elimination ofsubsidiaries. All intercompany balancesaccounts and transactions.transactions have been eliminated in consolidation.
On April 12, 2017,September 9, 2021, the Company completed its acquisition of Dixie Drawl, LLC d/b/a InPharmicsRxInnovation Inc., operating as FDS Amplicare (“InPharmics”FDS Amplicare”). On; on December 8, 2016,29, 2021, the Company completed its acquisition of Ateb,ReCept Holdings, Inc. (“ReCept”); and Ateb Canada Ltd. (together, “Ateb”). On January 5, 2016,on December 31, 2021, the Company completed its acquisition of Aesynt Holding Cooperatief U.A.MarkeTouch Media, LLC (“Aesynt”MarkeTouch Media”). The consolidated financial statementsConsolidated Financial Statements include the results of operations of these recently acquired companies, commencing as of theirthe respective acquisition dates. The significant accounting policies of the acquired businesses have been aligned to conform to the accounting policies of Omnicell.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed 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. Those policies are revenue recognition; allowance for credit losses for accounts receivable and unbilled receivables; notes receivable from investment in sales-type leases; operating lease right-of-use assets and liabilities; inventory valuation; capitalized software development costs; impairment of goodwill; purchased intangibles and long-lived assets; fair value of assets acquired and liabilities assumed in business combination;combinations; convertible senior notes; share-based compensation; and accounting for income taxes.
As of December 31, 2021, 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’s segmentsCompany at the consolidated level using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs thatoperations, and other key financial data. All significant operating decisions are not specific to eitherbased upon an analysis of the reportable segments and are managed separately atCompany as 1 operating segment, which is the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses. See Note 14, Segment and Geographical Information, for additional information on segment reporting.same as its reporting segment.
Foreign Currency Translation and Remeasurement
Most of the Company’s foreign subsidiaries use the local currency of their respective countries as their functional currency. The Company translates the assets and liabilities of such non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recorded as foreign currency translation adjustments and included in accumulated other comprehensive income (loss) in stockholders’ equity.
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Assets and liabilities denominated in a currency other than the functional currency are remeasured into the respective entity’s functional currency. Monetary assets and liabilities are remeasured at exchange rates in effect at the end of each period, and non-monetary assets and liabilities are remeasured at historical rates. Gains and losses from foreign currency remeasurement of monetary assets and liabilities are recorded in interest and other income (expense)., net.
Revenue Recognition
The Company earns revenues from sales of its medication and supply dispensing automation systems, along with consumablesproducts and related services, which are sold in the healthcare industry, its principal market. The transaction price of each contract with a customer is allocated to the identified performance obligations based on the relative fair value of each obligation. The Company’s customer arrangements typically include one or more of the following performance obligations:revenue categories:
Post-installation technical support. Phonesupport 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.
Software-as-a-service (“SaaS”), subscription software, and technology-enabled services. Other customer 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, ReCept management services, such as training and consulting.services associated with Omnicell One, Central Pharmacy Dispensing Services, including the XR2 Automated Central Pharmacy system, and Central Pharmacy Compounding Services, including IV compounding automation solutions.
The following table summarizes revenue recognition for each revenue category which is further discussed below:
| 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 | ||||||||||||||||||
Prior to recognizing revenue, the Company identifies the contract, performance obligations, and transaction price, and allocates the transaction price to the performance obligations. All identified contracts meet the following required criteria:
Parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. A majority of the Company’s contracts are evidenced by a non-cancelable written agreement. Contracts for consumable products are generally evidenced by an order placed via phone or a manual purchase order.
Entity can identify each party’s rights regarding the goods or services to be transferred. Contract terms are documented within the written agreements. Where a written contract does not exist, such as for consumable products, the rights of each party are understood as following the Company’s standard business process and terms.
The entity can identify the payment terms for the goods or services to be transferred. Payment terms are documented within the agreement and are generally net 30 to 60 days from shipment of tangible product or services performed.performed for customers in the United States. Where a written contract does not exist, the Company’s standard payment terms are net 30 day terms.
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The contract has commercial substance (that is the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract.)contract). The Company’s agreements are an exchange of cash for a combination of products and services which result in changes in the amount of the Company’s future cash flows.
It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. The Company performs a credit check for all significant customers or
transactions and where collectability is not probable, payment in full or a substantial down payment prior to shipment is typically required to help assure the full agreed upon contract price will be collected.
Distinct goods or services are identified as performance obligations. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer are considered a single performance obligation. Where a good or service is determined not to be distinct, the Company combines the good or service with other promised goods or services until a bundle of goods or services that is distinct is identified. To identify its performance obligations, the Company considers all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. When performance obligations are included in separate contracts, the Company considers an entire customer arrangement to determine if separate contracts should be considered combined for the purposes of revenue recognition. Most of the Company’s sales, other than renewals of support and maintenance, contain multiple performance obligations, with a combination of hardware systems, consumables and software products, consumables, support and maintenance, and professional services.
The transaction price of a contract is determined based on the fixed consideration, net of an estimate for variable consideration such as various discounts or rebates provided to customers. As a result of the Company’s commercial selling practices, contract prices are generally fixed with minimal, if any, variable consideration.
The transaction price is allocated to separate performance obligations proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price the Company charges for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, the Company’s products and services are not generally sold separately. The Company uses an amount discounted from the list price as a best estimated selling price.
The Company recognizes revenue when the performance obligation has been satisfied by transferring a promised good or service to a customer. The good or service is transferred when or as the customer obtains control of the good or service. Determining when control transfers requires management to make judgments that affect the timing of revenues recognized. Generally, for products requiring a complex implementation, control passes when the product is installed and ready for use. For all other products, control generally passes when product has been shipped and title has passed. For maintenance contracts and certain other services, including SaaS, subscription software, and technology-enabled services, provided on a subscription basis, control passes to the customer over time, generally ratably over the service term as the Company provides a stand-ready service to servicefor the customer’s equipment. Time and material services transfer control to the customer at the time the services are provided. The portion of the transaction price allocated to the Company’s unsatisfied performance obligations recorded as deferred revenues, net of deferred cost of goods sold, at December 31, 20182021 and December 31, 20172020 were $92.4$132.4 million and $89.4$105.7 million, respectively, of which $81.8$112.2 million and $78.8$100.1 million, respectively, are expected to be completed within one year.year and are presented as current deferred revenues, net on the Consolidated Balance Sheets. Remaining performance obligations primarily relate to maintenance contracts and are recognized ratably over the remaining term of the contract, generally not more than five years.
Revenues, contract assets, and contract liabilities are recorded net of associated taxes.
The payment terms associated with the Company’s contracts vary, however, payment termsCompany generally invoices customers for product revenues are generally based on milestones tied to contract signing, shipment of products and/or customer acceptance. Payment termsupon shipment. Invoicing associated with the service portion of agreements are generally periodic and can beare billed on a monthly, quarterly, or annual basis. In certain circumstances, multiple years are billed at one time.
The amount invoiced for equipment and software is typically reflected in both accounts receivable and deferred revenues, net. The Company typically recognizes product revenue, and correspondingly reduces deferred revenues, net, for equipment and on-premise software upon written customer acceptance of installation. Consumables are recorded as revenue upon shipment to or receipt by the customer, depending upon contract terms. The portion of these contract liabilitiesdeferred revenues, net, not expected to be recognized as revenue within twelve months of the balance sheet date are considered long term.included in long-term deferred revenues on the Consolidated Balance Sheets.
From time to time, the Company enters into change orders which modify the product to be received by the customer pursuant to certain contracts. Changes to any contract are accounted for as a modification of the existing contract to the extent the goods and services to be delivered as part of the contract are generally consistent with the nature and type of those to be provided under the terms of the original contract. Examples of such change orders include the addition or removal of units of
F-13
equipment or changes to the configuration of the equipment where the overall nature of the contract remains intact. The Company’s change orders generally result in the change being accounted for as modifications of existing contracts given the nature of the impacted orders.
In the normal course of business, the Company typically does not accept product returns unless the item is defective as manufactured or the configuration of the product is incorrect. The Company establishes provisions for estimated returns based on historical product returns. The allowance for sales returns is not material to the Consolidated Financial Statements for any periods presented.
The Company contracts with Group Purchasing Organizations (“GPOs”), each of which functions as a purchasing agent on behalf of member hospitals and other healthcare providers, as well asproviders. The Company also has a Federal Supply Schedule Contract with the Department of Veterans Affairs (the “GSA Contract”), allowing the Department of Veterans Affairs, the Department of Defense, and other Federal government entities and agencies.customers to purchase the Company’s products. Pursuant to the terms of GPO agreements and the GSA Contract, each member or agency contracts directly with Omnicell and can purchase the Company’s productproducts at pre-negotiated contract terms and pricing. GPOs are often owned fully or in part 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 $8.7$17.5 million, $7.4$9.7 million, and $8.4$11.1 million for the years ended December 31, 2018, December 31, 2017,2021, 2020, and December 31, 2016,2019, respectively. The accounts receivable balances are with individual members of the GPOs and Federal agencies that purchase under the GSA Contract, and therefore no significant concentration of credit risk exists. During the year ended December 31, 2018,2021, sales to members of the ten largest GPOs and Federal agencies that purchase under the GSA Contract accounted for approximately 59%67% of the Company’s total consolidated revenue.revenues.
Contract Assets and Contract Liabilities
A contract asset is a right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional and is not just subject to the passage of time. A receivable will be recorded on the balance sheet when the Company has unconditional rights to consideration. A contract liability is an obligation to transfer goods or services for which the Company has received consideration, or for which an amount of consideration is due from the customer. Contract liabilities include customer deposits under non-cancelable contracts, and current and non-current deferred revenue balances. The Company’s contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
| December 31, 2018 | December 31, 2017 | ||||||
| (In thousands) | |||||||
| Short-term unbilled receivables - included in accounts receivable and unbilled receivables | $ | 9,191 | $ | 4,590 | |||
| Long-term unbilled receivables - included in other long-term assets | 16,481 | 9,475 | |||||
| Total contract assets | $ | 25,672 | $ | 14,065 | |||
| Short-term deferred revenues, net | $ | 81,835 | $ | 78,774 | |||
| Long-term deferred revenues | 10,582 | 10,623 | |||||
| Total contract liabilities | $ | 92,417 | $ | 89,397 | |||
Significant changes in the contract assets and the contract liabilities balances during the period are the result of the issuance of invoices and recognition of deferred revenues in the normal course of business. Unbilled contract assets which were invoiced during the year ended December 31, 2018 as a result of the right to invoice for the transaction consideration becoming unconditional were not material. The contract modifications entered into during the year ended December 31, 20182021 did not have a significant impact on the Company’s contract assets or deferred revenues. During the year ended December 31, 2018, the Company recognized revenues of $85.7 million that were included in the corresponding gross short-term deferred revenue balance of $95.7 million as of December 31, 2017.
Contract Costs
The Company has determined that thecertain incentive portions of its sales commission plans require capitalization since these payments are directly related to sales achieved during a time period. These commissions are earned on the basis of the total purchase order value of new product bookings. Since there are notno commensurate commissions earned on renewal of the service bookings, the Company concluded that the capitalized asset is related to services provided under both the initial contract and renewal periods. The Company applies a practical expedient to account for the incremental costs of obtaining a contract as part of a portfolio of contracts with similar characteristics as the Company expects the effect on the financial statements of applying the practical expedient would not differ materially from applying the accounting guidance to the individual contracts within the portfolio. A pool of contracts is defined as all contracts booked in a particular quarter. The amortization for the capitalized asset is an estimate of the pool’s original contract term, generally one to five years, plus an estimate of future customer renewal periods resulting in a total amortization period of ten years. Costs to obtain a contract are allocated amongst
performance obligations and recognized as sales and marketing expense consistent with the pattern of revenue recognition. Capitalized costs are periodically reviewed for impairment. AIn accordance with GAAP, while certain compensation elements are expensed as incurred, a portion of the pool’s capitalized asset is recorded as an expense over the first twofive quarters after booking, which represents the estimated period during which the product revenue associated with the contract is recorded. The remaining capitalized contract cost iscosts are recorded as expense ratably over the ten year estimated initial and renewal service periods. The Company recognized contract cost expense of $21.1$25.8 million, $17.9$22.1 million, and $18.8$24.4 million during the years ended December 31, 2018, December 31, 2017,2021, 2020, and December 31, 2016,2019, respectively. The commission expenses paid or due to be paid as of the consolidated balance sheet date to be recognized in future periods are recorded in long-term prepaid commissions on the Consolidated Balance Sheets. There was no impairment loss recorded related to capitalized prepaid commissions as of and for the year ended December 31, 2018.2021.
F-14
Lessor Leases
The Company determines if an arrangement is a lease at inception. The transaction price is allocated to separate performance obligations, generally consisting of a combination of hardware systems, software products, support and maintenance, and professional services, proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price the Company charges for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, the Company’s products and services are not generally sold separately. The Company uses an amount discounted from the list price as a best estimated selling price.
Sales-Type Leases
The Company enters into non-cancelable sales-type lease arrangements, most of which do not have an option to extend the lease term. At the end of the lease term, the customer must either return the equipment or negotiate a new agreement, resulting in a new purchase or lease transaction. Failure of the customer to either return the equipment or negotiate a new agreement results in the contract becoming a month-to-month rental. Certain sales-type leases automatically renew for successive one-year periods at the end of each lease term without written notice from the customer. The Company’s sales-type lease agreements do not contain any material residual value guarantees.
For sales-type leases, the Company recognizes revenues for its hardware and software products, net of lease execution costs, post-installation product maintenance, and technical support, at the net present value of the lease payment stream upon customer acceptance. The Company recognizes service revenues associated with sales-type leases ratably over the term of the agreement in service revenues in the Consolidated Statements of Operations. The Company recognizes interest income from sales-type leases using the effective interest method. Both hardware and software revenues, and interest income from sales-types leases are recorded in product revenues in the Consolidated Statements of Operations.
The Company optimizes cash flows by selling a majority of its non-U.S. government 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. Some of the Company’s sales-type leases, mostly those relating to U.S. government hospitals which comprise approximately 69% of the lease receivable balance, are retained in-house.
Operating Leases
The Company entered into certain leasing agreements that were classified as operating leases prior to the adoption of Accounting Standards Codification (“ASC”) 842, Leases. Those 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 entered into prior to January 1, 2019 are non-cancelable, and most automatically renew for successive one-year periods at the end of each lease term absent written notice from the customer. The Company’s operating lease agreements do not contain any material residual value guarantees.
For operating leases, rental income is generally recognized on a straight-line basis over the term of the associated lease, and recorded in services and other revenues in the Consolidated Statements of Operations. Leased assets under operating leases are carried at amortized cost net of accumulated depreciation in property and equipment, net on the Consolidated Balance Sheets. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the associated lease, and recorded in cost of revenues in the Consolidated Statements of Operations.
Allowance for Credit Losses
The Company is exposed to credit losses primarily through sales of its products and services, as well as its sales-type leasing arrangements. The Company performs credit evaluations of its customers’ financial condition in order to assess each customer’s ability to pay. These evaluations require significant judgment and are based on a variety of factors including, but not limited to, current economic trends, payment history, and a financial review of the customer. The Company continues to monitor customers’ creditworthiness on an ongoing basis.
The Company maintains an allowance for credit losses for accounts receivable, unbilled receivables, and net investment in sales-type leases based on expected credit losses resulting from the inability of its customers to make required payments. The allowance for credit losses is measured using a loss rate method, considering factors such as customers’ credit risk, historical loss experience, current conditions, and forecasts. The allowance for credit losses is measured on a collective (pool) basis by aggregating customer balances with similar risk characteristics. The Company also records a specific allowance based on an analysis of individual past due balances or customer-specific information, such as a decline in creditworthiness or
F-15
bankruptcy. Actual collection losses may differ from management’s estimates, and such differences could be material to the Company’s financial position and results of operations.
The allowance for credit losses is presented in the Consolidated Balance Sheets as a deduction from the respective asset balance. As of December 31, 2021 and 2020, the allowance for credit losses for long-term unbilled receivables and net investment in sales-type leases were not material.
Funds Held for Customers and Customer Fund Liabilities
With the acquisition of the 340B Link Business and ReCept, the Company offers certain products and services in which it is customary for pharmacies or insurance payors to owe funds to the Company which are collected on behalf of, and, after a short holding period, disbursed to, the Company’s customers. The Company presents amounts due from pharmacies and amounts due to be disbursed to customers on a gross basis within other current assets and accrued liabilities, respectively, in the Consolidated Balance Sheets, as such amounts are expected to be settled within one year. Generally, any funds received from the pharmacies or insurance payors that are held by the Company are segregated from its other corporate cash accounts. These funds are classified as restricted cash as the Company is contractually obligated to disburse these amounts to customers.
Sales of Accounts Receivable
The Company records the sale of its accounts receivables in accordance with accounting guidance for transfers and servicing of financial assets. The Company transferred non-recourse accounts receivable totaling $46.7 million, $58.8 million, and $48.3 million during the years ended December 31, 2021, 2020, and 2019, respectively, which approximated fair value, to leasing companies on a non-recourse basis. Accounts receivable balance included approximately $5.6 million and $7.8 million due from third-party leasing companies for transferred non-recourse accounts receivable as of December 31, 2021 and 2020, respectively.
Cash and Cash Equivalents
The Company classifies all highly-liquid investments with original maturities of three months or less as cash equivalents. The Company’s cash and cash equivalent balances include bank accounts and highly-liquid U.S. Government money market funds held in sweep and asset management accounts with financial institutions of high credit quality. The Company continuously monitors the credit worthiness of the financial institutions in which it invests. The Company has not experienced any credit losses from its cash equivalents. Cash and cash equivalents were $349.1 million and $485.9 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021 and 2020, cash equivalents were $320.2 million and $447.2 million, respectively, which consisted of money market funds held in sweep and asset management accounts.
Financial Instruments
For assets and liabilities measured at fair value, the amounts are based on an expected exit price representing the amount that would be received from the sale of an asset or paid to transfer a liability in a transaction between market participants. The fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurementsASC 820, Fair Value Measurement, establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs used in valuation techniques are assigned a hierarchical level. level, as follows:
Level 1 – Observable inputs, such as quoted prices in active markets for identical instruments;
Level 2 – Quoted prices for similar instruments in active markets, or quoted prices for identical instruments in inactive markets; and
Level 3 – Unobservable inputs for financial instruments reflecting Company’s assumptions.
Interest Rate Swap Agreements
The following methods were usedCompany uses interest rate swap agreements to estimateprotect the fair valueCompany against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of each class ofits outstanding debt. The Company does not hold or issue any derivative financial instruments for which it is practical to estimate that value:speculative trading purposes.
F-16
Inventory
Inventories are stated at the lower of cost, computed using the first-in, first-out method, and net realizable value. Inbound shipping costs are included in cost of inventory. The Company regularly monitors inventory quantities on hand and records write-downs for excess and obsolete inventories based on the Company’s estimate of demand for its products, potential obsolescence of technology, product life cycles, and whether pricing trends or forecasts indicate that the carrying value of inventory exceeds its estimated selling price. These factors are impacted by market and economic conditions, technology changes, and new product introductions and require estimates that may include elements that are uncertain. Actual demand may differ from forecasted demand and may have a material effect on gross margins. If inventory is written down, a new cost basis is established that cannot be increased in future periods. Shipments from suppliers or contract manufacturers before the Company receives them are recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to the Company.
The Company has a supply agreement with one primary supplier for construction and supply of several sub-assemblies and inventory management of sub-assemblies used in its hardware products. There wereare no minimum purchase requirements. The contract with the Company’s supplier may be terminated by either the supplier or by the Company without cause and at any time upon delivery of twosix months’ notice. Purchases from this supplier were $54.8$103.2 million, $64.5$76.3 million, and $47.9$75.1 million for the years ended December 31, 2018,2021, 2020, and 2019, respectively.
Shipping Costs
Outbound freight billed to customers is recorded as product revenue. The related shipping and handling costs are expensed as part of selling, general, and administrative expense. Shipping and handling expenses were $18.2 million, $15.6 million, and $15.9 million for the years ended December 31, 2017,2021, 2020, and December 31, 2016,2019, respectively.
Property and Equipment
Property and equipment less accumulated depreciation are stated at historical cost. The Company’s expenditures for property and equipment are primarily for computer equipment and software used in the administration of its business, and for leasehold improvements to its leased facilities. The Company also develops molds and dies used in long-term manufacturing arrangements with suppliers and for production automation equipment used in the manufacturing of consumable blister card components.
Depreciation and amortization is computed by use of the straight-line method over the estimated useful lives of the assets as stated below:
| Computer equipment and related software | 3 - 5 years | ||||
| Leasehold and building improvements | Shorter of the lease term or the estimated useful life | ||||
| Furniture and fixtures | 5 - 7 years | ||||
| Equipment | |||||
The Company capitalizes costs related to computer software developed or obtained for internal use in accordance with ASC 350-40, Internal-Use Software. Software obtained for internal use has generally beenincludes enterprise-level business and finance software that the Company customizes to meet its specific operational needs.needs, as well as certain costs for the development of its subscription and cloud-based offerings sold to its customers. Costs incurred in the application development phase are capitalized and amortized over their useful lives, which is generally five years. Costs recognized in the preliminary project phase and the post-implementation phase are expensed as incurred. The Company capitalized $1.1$12.7 million and $0.4$6.8 million of costs related to the application development of enterprise-level software and its subscription and cloud-based offerings that waswere included in property and equipment during the years ended December 31, 20182021 and December 31, 2017,2020, respectively.
Software Development Costs
The Company capitalizes certain software development costs in accordance with ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed, under which certain software developmentthose costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products. The Company establishes technological feasibility when it completes a detail program design or a working model andmodel. The Company amortizes development costs over the estimated lives of the related products, ranging from three towhich is generally five years. The Company capitalized software development costs of $30.7$29.4 million and $15.0$32.0 million, which are included in other long-term assets as of December 31, 20182021 and December 31, 2017,2020, respectively. The Company recorded $12.5$26.4 million, $9.7$23.1 million, and $7.1$17.5 million to cost of revenues for amortization of capitalized software development costs for the years ended December 31, 2018, December 31, 2017,2021, 2020, and December 31, 2016,2019, respectively. All development costs prior to the completion of a detail program design or a working model are recognized as research and development expense.
F-17
Lessee Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of its lease contracts do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of the lease payments. Lease expense is recognized on a straight-line basis over the lease term. The Company does not recognize a right-of-use asset and a lease liability for leases with an initial term of twelve months or less. The Company elected the practical expedient to not separate lease components from nonlease components and applied that practical expedient to all material classes of leased assets.
Many of the Company’s operating leases include an option to extend the lease. The specific terms and conditions of the extension options vary from lease to lease, but are consistent with standard industry practices in each area that the Company operates. The Company reviews each of its lease options at a time required by the terms of the lease contract, and notifies the lessor if it chooses to exercise the lease renewal option. Until the Company is reasonably certain that it will extend the lease contract, the renewal option periods will not be recognized as right-of-use assets or lease liabilities.
Certain leases include provisions for early termination, which allow the contract parties to terminate their obligations under the lease contract. The terms and conditions of the termination options vary by contract. When the Company has made a decision to exercise an early termination option, the right-of-use assets and associated lease liabilities are remeasured in accordance with the present value of the remaining cash flows under the lease contract.
Certain building lease agreements include rental payments subject to change annually based on fluctuations in various indexes (i.e. Consumer Price Index (“CPI”), Retail Price Index, and other international indexes). Certain data center lease agreements include rental payments subject to change based on usage and CPI fluctuations. The changes based on usage and indexes are treated as variable lease costs and recognized in the period in which the obligation for those payments was incurred.
The Company’s operating lease agreements do not contain any material residual value guarantees, restrictions, or restriction covenants.
Business Combinations
The Company uses the acquisition method of accounting under the authoritative guidance on business combinations.ASC 805, Business Combinations. Each acquired company’s operating results are included in the Company'sCompany’s Consolidated Financial Statements starting on the date of acquisition.acquisition date. The purchase price is equivalent to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired and liabilities assumed as of the acquisition date of acquisition are recorded at the acquisition date fair value. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed.
Amounts allocated to assets and liabilities are based upon fair values. Such valuations require management to make significant estimates and assumptions, especially with respect to the identifiable intangible assets. Management makes estimates of fair value based upon assumptions believed to be reasonable and that of a market participant. These estimates are based on available historical experience and information obtained from the management of the acquired companiesas well as future expectations, and the estimates are inherently uncertain. The separately identifiable intangible assets generally include customer relationships, acquired technology, backlog, trade names, and trade names.non-compete agreements.
Goodwill and Acquired Intangible Assets
The Company reviews goodwill for impairment on an annual basis on the first day of the fourth quarter of each year at the reporting unit level. This assessment is also performed whenever there is a change in circumstances that indicates the carrying value of goodwill may be impaired. The Company’sCompany has 1 reporting units areunit, which is the same as its operating segments, which are Automation and Analytics and Medication Adherence.segment. A qualitative assessment is initially made to determine whether it is necessary to perform quantitative testing. A qualitative assessment includes, among others, consideration of: (i) past, current, and projected future earnings and equity; (ii) recent trends and market conditions; and (iii) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available. If this qualitative assessment indicates that it is more likely than not that impairment exists, or if the Company decides to bypass this option, it proceeds to the quantitative assessment. The quantitative assessment involves a comparison between the estimated fair valuesvalue of the Company’s reporting unitsunit with their respectiveits carrying amountsamount including goodwill. If the carrying value exceeds estimated fair value, the Company will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit.goodwill.
To determine eachthe reporting unit’s fair value under the quantitative approach, the Company uses a combination of income and market approaches, equally weighting the two approaches, such as estimated discounted future cash flows of that the
F-18
reporting unit, multiples of earnings or revenues, and analysis of recent sales or offerings of comparable entities. The Company also considers its market capitalization on the date of the analysis to ensure the reasonableness of the sum of its reporting units’unit’s fair value.
The Company performed a quantitative impairment analysis as of October 1, 2018 for its Medication Adherence reporting unit. The Company determined that the fair value of this reporting unit exceeded the carrying value by more than 41%, and thus no impairment was indicated. Additionally, the Company performed a qualitative impairment assessment analysis as of October 1, 20182021 for its Automation and Analytics reporting unit taking into consideration past, current, and projected future earnings, recent trends, and market conditions;conditions, and valuation metrics involving similar companies that are publicly-traded. Based on the result of this analysis, an impairment does not exist as of December 31, 2018.2021, and there were no accumulated impairment losses.
Intangible assets.Assets
In connection with its acquisitions, the Company’s acquisitions, itCompany generally recognizes assets for customer relationships, acquired technology, backlog, developed technology,trade names, and trade names.non-compete agreements. Intangible assets are carried at cost less accumulated amortization. Such amortization is provided on a straight-line basis or on an accelerated basis based on a pattern of economic benefit that is expected to be obtained over the estimated useful lives of the respective assets, generally from one to 30 years.assets. Amortization for developedacquired technology and backlog is recognized in cost of revenues, and amortization for customer relationships, trade names, non-compete agreements, and trade namespatents is recognized in selling, general, and administrative expenses.
The Company assesses the impairment of identifiable intangible assets whenever events or changes in circumstances indicate that an asset’s carrying amount may not be recoverable. Recoverability of an asset is measured by the comparison of the carrying amount to the sum of the undiscounted estimated future cash flows the asset is expected to generate, offset by estimated future costs to dispose of the product to which the asset relates. If an asset is considered to be impaired, the amount of such impairment would be measured as the difference between the carrying amount of the asset and its fair value. The Company’s cash flow assumptions are based on historical and forecasted future revenue, operating costs, and other relevant factors. Assumptions and estimates about the remaining useful lives of the Company’s intangible assets are subjective and are affected by changes to its business strategies. If management’s estimates of future operating results change, or if there are changes to other assumptions, the estimate of the fair value of the Company’s assets could change significantly. Such change could result in impairment charges in future periods, which could have a significant impact on the Company’s operating results and financial condition. For the years ended December 31, 20182021 and December 31, 2017,2020, there were no events or changes in circumstances to indicate that intangible assets carrying amounts may not be recoverable.
Convertible Debt
The Company accounts for convertible debt and related transactions in accordance with ASC 470-20, Debt with Conversion and Other Options, ASC 815, Derivatives and Hedging, and ASC 480, Distinguishing Liabilities from Equity. The Company evaluates convertible debt instruments and related transactions at inception to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for. Convertible debt instruments that may be settled in cash are separated into liability and equity components. The allocation to the liability component is based on the fair value of a similar instrument that does not contain an equity conversion option. Based on this debt-to-equity ratio, debt issuance costs are then allocated to the liability and equity components in a similar manner. The difference between the principal amount of the convertible debt instruments and the liability component, inclusive of issuance costs, represents the debt discount, which is amortized to interest expense over the term of instruments. The determination of the discount rate requires certain estimates and assumptions.
Convertible note hedge and warrant transactions associated with convertible debt instruments are accounted for as equity instruments, and are recorded in additional paid-in capital in the Consolidated Balance Sheets.
Valuation of Share-Based Compensation
The Company accounts for share-based compensation in accordance with ASC 718, Stock Compensation. The Company recognizes compensation expense related to share-based compensation based on the grant date estimated fair value.
The fair value of stock options (“options”) on the grant date is estimated using the Black-Scholes option pricing model, which requires the following inputs: expected life, expected volatility, risk-free interest rate, expected dividend yield rate, exercise price, and closing price of its common stock on the date of grant. The expected volatility is based on a combination of historical and market-based implied volatility, and the expected life of the awards is based on the Company’s historical experience of employee stock option exercises, including forfeitures. Expense is recognized on a straight-line basis over the requisite service period.
The fair value of restricted stock units (“RSUs”) is based on the stock price on the grant date. The fair value of restricted stock awards (“RSAs”) is their intrinsic value, which is the difference between the fair value of the underlying stock at the measurement date and the purchase price. The RSUs and RSAs are subject to a service vesting condition and are recognized on a straight-line basis over the requisite service period.
F-19
The fair value of performance-based stock unit awards (“PSUs”) with service and market conditions is estimated using a Monte Carlo simulation model applying a multiple awards approach. Expense is recognized when it is probable that the performance condition will be met using the accelerated attribution method over the requisite service period.
Forfeiture rates are estimated based on the Company’s historical experience with equity awards that were granted and forfeited prior to vesting. The valuation assumptions used in estimating the fair value of employee share-based awards may change in future periods.
Accounting for Income Taxes
The Company records an income tax provision for (benefit from) the anticipated tax consequences of the reported results of operations. In accordance with U.S. GAAP,ASC 740, Income Taxes, the provision for (benefit from) income taxes is computed using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities and for operating losses and tax credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the periods in which those tax assets and liabilities are expected to be realized or settled. In the event that these tax rates change, the Company will incur a benefit or detriment on its income tax expense in the period of change. If the Company were to determine that all or part of the net deferred tax assets are not realizable in the future, it will record a valuation allowance that would be charged to earnings in the period such determination is made.
In accordance with ASC 740, Income Taxes, the Company recognizes the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of U.S. GAAPASC 740 and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on the Company’s financial condition and operating results.
Recently Adopted Authoritative Guidance
In May 2014,December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The update simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC 606, Revenue from Contracts with Customers, a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control740, Income Taxes, as well as improves consistent application of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applyingsimplifies the guidance recognized at the datefor other areas of initial application (modified retrospective method).ASC 740 by clarifying and amending existing guidance. The Company adopted the standard using the full retrospective method effective beginningASU 2019-12 on January 1, 2018.
| Year Ended December 31, 2017 | |||||||||||
| As Reported | Adjustment | As Adjusted | |||||||||
| (In thousands, except per share data) | |||||||||||
| Revenues | |||||||||||
| Automation and Analytics | $ | 590,392 | $ | (3,451 | ) | $ | 586,941 | ||||
| Medication Adherence | 125,773 | — | 125,773 | ||||||||
| Gross profit | |||||||||||
| Automation and Analytics | 281,949 | (3,451 | ) | 278,498 | |||||||
| Medication Adherence | 40,139 | — | 40,139 | ||||||||
| Selling, general, and administrative expenses | 250,312 | (8,842 | ) | 241,470 | |||||||
| Provision for (benefit from) income taxes | (21,484 | ) | (4,522 | ) | (26,006 | ) | |||||
| Net income | $ | 20,605 | $ | 9,913 | $ | 30,518 | |||||
| Net income per share - basic | $ | 0.55 | $ | 0.26 | $ | 0.81 | |||||
| Net income per share - diluted | $ | 0.53 | $ | 0.26 | $ | 0.79 | |||||
| Year Ended December 31, 2016 | |||||||||||
| As Reported | Adjustment | As Adjusted | |||||||||
| (In thousands, except per share data) | |||||||||||
| Revenues | |||||||||||
| Automation and Analytics | $ | 593,626 | $ | 3,285 | $ | 596,911 | |||||
| Medication Adherence | 98,997 | — | 98,997 | ||||||||
| Gross profit | |||||||||||
| Automation and Analytics | 282,659 | 3,285 | 285,944 | ||||||||
| Medication Adherence | 31,141 | — | 31,141 | ||||||||
| Selling, general, and administrative expenses | 249,520 | (11,639 | ) | 237,881 | |||||||
| Provision for (benefit from) income taxes | (2,551 | ) | 5,771 | 3,220 | |||||||
| Net income | $ | 603 | $ | 9,153 | $ | 9,756 | |||||
| Net income per share - basic | $ | 0.02 | $ | 0.25 | $ | 0.27 | |||||
| Net income per share - diluted | $ | 0.02 | $ | 0.24 | $ | 0.26 | |||||
| December 31, 2017 | |||||||||||
| As Reported | Adjustment | As Adjusted | |||||||||
| (In thousands) | |||||||||||
| Accounts receivable and unbilled receivables, net | $ | 189,227 | $ | 819 | $ | 190,046 | |||||
| Prepaid expenses | 36,060 | (15,668 | ) | 20,392 | |||||||
| Prepaid commissions | — | 41,432 | 41,432 | ||||||||
| Other long-term assets | 39,841 | 9,475 | 49,316 | ||||||||
| Deferred revenues, net | 86,104 | (7,330 | ) | 78,774 | |||||||
| Long-term, deferred revenues | 17,244 | (6,621 | ) | 10,623 | |||||||
| Long-term, deferred tax liabilities | 28,579 | 12,867 | 41,446 | ||||||||
| Stockholders’ equity | 517,199 | 37,142 | 554,341 | ||||||||
Recently Issued Authoritative Guidance
In February 2016,August 2020, the FASB issued ASU 2020-06, 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 will adopt ASU 2020-06 on January 1, 2022, and expects to use the modified retrospective method of transition. The Company’s adoption of the update is estimated to result in an increase in convertible senior notes, net of issuance costs, of $75.4 million; a decrease in additional paid-in capital of $72.7 million; a decrease of long-term deferred tax liabilities of $19.8 million; a decrease in long-term deferred tax assets of $0.5 million; and an increase in retained earnings of $16.7 million, all as of January 1, 2022. 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.
In October 2021, the FASB issued ASU 2016-02, Leases2021-08, Business Combinations (Topic 842)805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The FASB amended lease accounting requirements to begin recordingupdate addresses diversity in practice by requiring that an acquirer recognize and measure contract assets and liabilities arisingacquired in a business combination in accordance with ASC 606, Revenue from most leases on the balance sheet.Contracts with Customers. The new guidance will also require significant additional disclosures aboutbe applied prospectively to acquisitions occurring on or after the amount and timingeffective
F-20
date. ASU 2021-08 will be effective for the Company beginning January 1, 2019. In July 2018, the FASB issued amendments in ASU 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application to the beginning of the year of2023, and early adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. The Company will elect this transition approach as well as elect the package of practical expedients permitted under the transition guidance within the new standard, which will allow the Company to carry forward the historical lease classification of contracts entered into prior to January 1, 2019. The Company will also elect to combine lease and non-lease components, and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the Consolidated Statements of Operations on a straight-line basis over the lease term.
There was no other recently issued and effective authoritative guidance that is expected to have a material impact on the Company’s Condensed Consolidated Financial Statements through the reporting date.
Note 2. Business Combinations |
received. The Company accounted forbelieves that the acquisitions of Aesynt and Ateb in accordance withfair values assigned to the authoritative guidance on business combinations; therefore, the tangible and intangible 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 Consolidated Financial Statements include the results of operations of each acquired company, commencing as of the respective acquisition dates. Acquisition-related costs were recorded at fair value on the acquisition dates, respectively. The Company incurred approximately $9.3 million in acquisition-related costs related to the Aesynt acquisition of which $6.4 million was recognized in the year ended December 31, 2016. During the year ended December 31, 2016, the Companyexpensed as incurred, and expensed approximately $1.7 million of acquisition-related costs for Ateb. These costs are included in selling, general, and administrative expenses in the Company’s Consolidated StatementStatements of Operations.
2021 Acquisitions
MarkeTouch Media
On December 31, 2021, the Company completed the acquisition of all of the outstanding equity interests in 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 Company incurred approximately $1.2 million in acquisition-related costs related to the MarkeTouch Media acquisition during the year ended December 31, 2021.
ReCept
On December 29, 2021, the Company completed the acquisition of all outstanding equity securities 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 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 Company incurred approximately $2.5 million in acquisition-related costs related to the ReCept acquisition during the year ended December 31, 2021.
FDS Amplicare
On September 9, 2021, the Company completed the acquisition of all of the outstanding equity interests in 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 the Company’s EnlivenHealth offering.
The Company incurred approximately $7.0 million in acquisition-related costs related to the FDS Amplicare acquisition during the year ended December 31, 2021. Revenues and net losses from the FDS Amplicare operations since the acquisition date through December 31, 2021 were $11.3 million and $0.9 million, respectively.
F-21
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 (Preliminary) (2) | MarkeTouch Media (Preliminary) | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Purchase price transferred: | |||||||||||||||||
| Base purchase price | $ | 177,000 | $ | 100,000 | $ | 82,000 | |||||||||||
| Add: Closing cash | 465 | 6,664 | 191 | ||||||||||||||
| Add: Net working capital adjustment | 1,654 | (2,296) | 448 | ||||||||||||||
| Less: Assumed indebtedness | (653) | (1,902) | (13) | ||||||||||||||
| Total purchase price transferred | $ | 178,466 | $ | 102,466 | $ | 82,626 | |||||||||||
FDS Amplicare (Preliminary) (1) | ReCept (Preliminary) (2) | MarkeTouch Media (Preliminary) | |||||||||||||||
| 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 | 13,955 | — | ||||||||||||||
| Total current assets | 6,346 | 16,530 | 2,635 | ||||||||||||||
| Property and equipment | 444 | 172 | 177 | ||||||||||||||
| Operating lease right-of-use assets | 2,252 | 773 | 602 | ||||||||||||||
| Goodwill | 117,374 | 81,588 | 42,530 | ||||||||||||||
| Intangible assets | 70,000 | 28,100 | 38,000 | ||||||||||||||
| Other long-term assets | 51 | 200 | 2,850 | ||||||||||||||
| Total assets | 196,467 | 127,363 | 86,794 | ||||||||||||||
| Accounts payable | 950 | 219 | 473 | ||||||||||||||
| Accrued compensation | 1,312 | 1,756 | — | ||||||||||||||
| Accrued liabilities | 1,396 | 18,499 | 292 | ||||||||||||||
| Deferred revenues | 1,916 | 222 | 347 | ||||||||||||||
| Long-term deferred tax liabilities | 11,377 | 3,587 | — | ||||||||||||||
| Long-term operating lease liabilities | 920 | 614 | 206 | ||||||||||||||
| Other long-term liabilities | 130 | — | 2,850 | ||||||||||||||
| Total liabilities | 18,001 | 24,897 | 4,168 | ||||||||||||||
| Total purchase price | $ | 178,466 | $ | 102,466 | $ | 82,626 | |||||||||||
| Total purchase price, net of cash acquired | $ | 178,001 | $ | 95,897 | $ | 82,389 | |||||||||||
(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.
(2) Closing cash is included in other current assets due to its restrictive nature as cash held for customers.
F-22
The $117.4 million of goodwill arising from the FDS Amplicare acquisition is primarily attributed to future sales of SaaS solutions and FDS Amplicare’s assembled workforce. None of the FDS Amplicare goodwill is expected to be deductible for tax purposes. The $81.6 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 ReCept goodwill is expected to be deductible for tax purposes. The $42.5 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.
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.
2020 Acquisition
340B Link Business
On October 1, 2020, the Company completed the acquisition of all of the outstanding equity of the 340B Link Business pursuant to the terms and conditions of the Equity Purchase Agreement, dated August 11, 2020, as amended, by and among the Company, PSGH, LLC, BW Apothecary Holdings, LLC, the sellers identified therein and the sellers’ representative for total cash consideration of $225.0 million. The 340B Link Business acquisition adds a comprehensive and differentiated suite of software-enabled services and solutions used by certain eligible hospitals, health systems, clinics, and entities to manage compliance and capture 340B drug cost savings on outpatient prescriptions filled through the eligible entity’s pharmacy or a contracted pharmacy partner.
The Company incurred approximately $6.5 million in acquisition-related costs related to the 340B Link Business acquisition during the year ended December 31, 2020. Revenues and earnings from the 340B Link Business operations since the acquisition date through December 31, 2020 were $10.2 million and $1.3 million, respectively.
F-23
The following table represents the allocation of the purchase price to the assets acquired and the liabilities assumed by the Company as part of the acquisition included in the Company's Consolidated Balance Sheets, and is reconciled to the purchase price transferred:
340B Link Business (1) | |||||
| (In thousands) | |||||
| Accounts receivable and unbilled receivables | $ | 8,197 | |||
| Prepaid expenses | 232 | ||||
| Other current assets | 23,040 | ||||
| Total current assets | 31,469 | ||||
| Property and equipment | 531 | ||||
| Operating lease right-of-use assets | 3,138 | ||||
| Goodwill | 160,268 | ||||
| Intangible assets | 62,800 | ||||
| Total assets | 258,206 | ||||
| Accounts payable | 568 | ||||
| Accrued liabilities | 23,715 | ||||
| Long-term deferred tax liabilities | 6,334 | ||||
| Long-term operating lease liabilities | 2,589 | ||||
| Total liabilities | 33,206 | ||||
| Total purchase price | $ | 225,000 | |||
(1) During the third quarter of 2021, the Company recorded measurement period adjustments of $0.9 million to goodwill, consisting of an increase in other current assets, a decrease in accrued liabilities, and a decrease in long-term deferred tax liabilities of $0.3 million, $0.1 million, and $0.5 million, respectively.
The $160.3 million of goodwill arising from the 340B Link Business acquisition is primarily attributed to sales of future software-enabled services and solutions and the 340B Link Business’s assembled workforce. Approximately $93.7 million of the 340B Link Business goodwill is expected to be deductible for tax purposes.
The identifiable intangible assets acquired and their estimated useful lives for amortization are as follows:
| 340B Link Business | |||||||||||
| Fair value | Useful life (years) | ||||||||||
| (In thousands, except for years) | |||||||||||
| Customer relationships | $ | 53,000 | 21 | ||||||||
| Acquired technology | 9,000 | 5 | |||||||||
| Trade names | 200 | 1 | |||||||||
| Non-compete agreements | 600 | 3 | |||||||||
| Total purchased intangible assets | $ | 62,800 | |||||||||
The customer relationships intangible asset represents the fair value of the underlying relationships and agreements with the 340B Link Business’s customers. The acquired technology intangible asset represents the fair value of the 340B Link Business’s portfolio of software and solutions that have reached technological feasibility and were part of the 340B Link Business’s offerings at the acquisition date. The trade names intangible asset represents the fair value of brand and name recognition associated with the marketing of the 340B Link Business’s software-enabled services and solutions. The non-compete agreements intangible asset represents the fair value of non-compete agreements with former key members of the 340B Link Business’s management.
The fair value of the customer relationships intangible asset was determined based on the excess earnings method; the fair values of the acquired technology and trade names intangible assets were determined based on the relief-from-royalty method; and the fair value of the non-compete agreements intangible asset was determined based on the lost profits method.
F-24
The key assumptions used in estimating the fair values of intangible assets included forecasted financial information; customer attrition rates; royalty rates of 10.0% and 0.5% for the acquired technology and trade names intangible assets, respectively; discount rate of 14.0% for all intangible assets; 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 trade names and non-compete agreements are being amortized over their estimated useful lives using the straight-line method of amortization.
Pro Forma Financial Information
The following table presents certain unaudited pro forma consolidated financial information for illustrative purposes only, for the years ended December 31, 20172021, 2020, and December 31, 20162019 as if thesethe FDS Amplicare, ReCept, and MarkeTouch Media acquisitions had been completed on January 1, 2016.2020 and the 340B Link Business acquisition had been completed on January 1, 2019. 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 January 1, 2016.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 reflecting the estimated impact of fair value adjustments for the respective periods. The pro forma adjustments include the impact of fair value adjustment relatedincluding, but not limited to, deferred revenues, inventory fair value adjustment, amortization and depreciation of intangible assets share-based compensation expense,and property and equipment acquired; imputed interest, interest expense, and amortization of deferreddebt issuance cost,costs related to acquisitions, as applicable; and certain classification to conform toacquisition-related costs incurred.
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Pro forma revenues | $ | 1,195,473 | $ | 986,310 | $ | 929,106 | |||||||||||
| Pro forma net income | $ | 79,981 | $ | 22,615 | $ | 56,897 | |||||||||||
Note 3. Revenues
Disaggregation of Revenues
The following table summarizes the Company’s accounting policies.revenues disaggregated by revenue type for the years ended December 31, 2021, 2020, and 2019:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| Connected devices, software licenses, and other | $ | 739,074 | $ | 560,368 | $ | 573,844 | |||||||||||
| Technical services | 206,989 | 202,383 | 194,183 | ||||||||||||||
| Consumables | 73,438 | 75,663 | 85,758 | ||||||||||||||
| SaaS, subscription software, and technology-enabled services | 112,517 | 53,794 | 43,242 | ||||||||||||||
| Total revenues | $ | 1,132,018 | $ | 892,208 | $ | 897,027 | |||||||||||
The following table summarizes the Company’s revenues disaggregated by geographic region, which is determined based on customer location, for the years ended December 31, 2021, 2020, and 2019:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands) | |||||||||||||||||
| United States | $ | 1,020,788 | $ | 797,602 | $ | 806,900 | |||||||||||
Rest of world (1) | 111,230 | 94,606 | 90,127 | ||||||||||||||
| Total revenues | $ | 1,132,018 | $ | 892,208 | $ | 897,027 | |||||||||||
(1) No individual country represented more than 10% of total revenues.
| Year Ended December 31, | |||||||
2017 (1) | 2016 (1) | ||||||
| (In thousands, except per share data) | |||||||
| Pro forma net revenues | $ | 713,272 | $ | 723,085 | |||
| Pro forma net income | $ | 30,683 | $ | 8,109 | |||
| Pro forma net income per share | $ | 0.82 | $ | 0.22 | |||
| Weighted-average number of shares | 37,483 | 36,156 | |||||
F-25
Contract Assets and Contract Liabilities
The following table reflects the Company’s contract assets and contract liabilities:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
Short-term unbilled receivables, net (1) | $ | 17,208 | $ | 13,895 | |||||||
Long-term unbilled receivables, net (2) | 18,084 | 17,205 | |||||||||
| Total contract assets | $ | 35,292 | $ | 31,100 | |||||||
| Short-term deferred revenues, net | $ | 112,196 | $ | 100,053 | |||||||
| Long-term deferred revenues | 20,194 | 5,673 | |||||||||
| Total contract liabilities | $ | 132,390 | $ | 105,726 | |||||||
(1) Included in accounts receivable and unbilled receivables in the Consolidated Balance Sheets.
(2) Included in other long-term assets in the Consolidated Balance Sheets. Short-term deferred revenues of $112.2 million and $100.1 million include deferred revenues from product sales and service contracts, net of deferred cost of sales of $22.4 million and $21.0 million, as of December 31, 2021 and 2020, 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 year ended December 31, 2021, the Company recognized revenues of $96.8 million that were included in the corresponding gross short-term deferred revenues balance of $121.1 million as of December 31, 2020. Long-term deferred revenues include deferred revenues from product and service contracts of $20.2 million and $5.7 million as of December 31, 2021 and 2020, 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 years ended December 31, 2021, 2020, and 2019. Also, there were no customers that accounted for more than 10% of the Company’s accounts receivable balance as of December 31, 2021 and 2020. |
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.period, using the treasury stock method. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards, and restricted stock units, computed usingas well as shares the treasury stock method.Company could be obligated to issue from its convertible senior notes and warrants, as described in Note 10, Convertible Senior Notes. 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.
F-26
The basic and diluted net income per share calculationcalculations for the years ended December 31, 2018, December 31, 2017,2021, 2020, and December 31, 2016 was2019 were as follows:
| Year Ended December 31, | |||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||
| (In thousands, except per share data) | |||||||||||||||||
| Net income | $ | 77,849 | $ | 32,194 | $ | 61,338 | |||||||||||
| Weighted-average shares outstanding – basic | 43,475 | 42,583 | 41,462 | ||||||||||||||
| Effect of dilutive securities from stock award plans | 2,136 | 1,160 | 1,481 | ||||||||||||||
| Effect of convertible senior notes | 2,044 | — | — | ||||||||||||||
| Effect of warrants | 288 | — | — | ||||||||||||||
| Weighted-average shares outstanding – diluted | 47,943 | 43,743 | 42,943 | ||||||||||||||
| Net income per share – basic | $ | 1.79 | $ | 0.76 | $ | 1.48 | |||||||||||
| Net income per share – diluted | $ | 1.62 | $ | 0.74 | $ | 1.43 | |||||||||||
| Anti-dilutive weighted-average shares related to stock award plans | 156 | 2,054 | 926 | ||||||||||||||
| Anti-dilutive weighted-average shares related to convertible senior notes and warrants | — | 11,816 | — | ||||||||||||||
| Year Ended December 31, | |||||||||||
| 2018 | 2017 | 2016 | |||||||||
| (In thousands, except per share data) | |||||||||||
| Net income | $ | 37,729 | $ | 30,518 | $ | 9,756 | |||||
| Weighted-average shares outstanding — basic | 39,242 | 37,483 | 36,156 | ||||||||
| Effect of dilutive securities from stock award plans | 1,317 | 1,229 | 708 | ||||||||
| Weighted-average shares outstanding — diluted | 40,559 | 38,712 | 36,864 | ||||||||
| Net income per share - basic | $ | 0.96 | $ | 0.81 | $ | 0.27 | |||||
| Net income per share - diluted | $ | 0.93 | $ | 0.79 | $ | 0.26 | |||||
| Anti-dilutive weighted-average shares related to stock award plans | 1,279 | 501 | 1,345 | ||||||||
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'sCompany’s interest rate swap contracts and foreign currency contractscredit facility are classified within Level 2 as the valuation inputs are based on quoted prices andor market observable data of similar instruments.
The following table representsCompany’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 December 31, 2021 and 2020, the fair value hierarchy of the Company’s financial assets measured at fairconvertible senior notes was $1.085 billion and $782.3 million, respectively, compared to their carrying value as of December 31, 2018:
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (In thousands) | |||||||||||||||
| Interest rate swap contracts | $ | — | $ | 562 | $ | — | $ | 562 | |||||||
| Total financial assets | $ | — | $ | 562 | $ | — | $ | 562 | |||||||
| Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| (In thousands) | |||||||||||||||
| Interest rate swap contracts | $ | — | $ | 1,378 | $ | — | $ | 1,378 | |||||||
| Total financial assets | $ | — | $ | 1,378 | $ | — | $ | 1,378 | |||||||
Company’s convertible senior notes.
Interest Rate Swap Contracts
During 2016, the Company entered into an interest rate swap agreement with a combined notional amount of $100.0 million with one counterparty that became effective on June 30, 2016 and is maturingmatured on April 30, 2019. The swap agreement requiresrequired the Company to pay a fixed rate of 0.8% and providesprovided that the Company will receive a variable rate based on the one month LIBOR rate subject to a LIBOR floor of 0.0%. Amounts payable by or due to the Company will bewere net settled with the respective counterparty on the last business day of each month, commencing July 31, 2016.
The fair value of theCompany’s interest rate swap agreements atagreement matured during the second quarter of 2019, and, as of December 31, 20182021 and December 31, 2017 was $0.6 million and $1.4 million, respectively. There were no amounts reclassified into current earnings due to ineffectiveness during2020, the periods presented.Company did not have any outstanding interest rate swap agreements.
F-27
Note 6. Balance Sheet Components
Balance sheet details as of December 31, 20182021 and December 31, 20172020 are presented in the tables below:
| December 31, | |||||||||||
| 2021 | 2020 | ||||||||||
| (In thousands) | |||||||||||
| Inventories: | |||||||||||
| Raw materials | $ | 48,215 | $ | 28,205 | |||||||
| Work in process | 11,009 | 7,973 | |||||||||
| Finished goods | 60,700 | 60,120 | |||||||||
| Total inventories | $ | 119,924 | $ | 96,298 | |||||||
| Other current assets: | |||||||||||
Funds held for customers, including restricted cash (1) | $ | 20,405 | $ | 18,164 | |||||||
| Net investment in sales-type leases, current portion | 10,665 | 10,246 | |||||||||
| Prepaid income taxes | 6,656 | 10,095 | |||||||||
| Other current assets | 10,608 | 2,539 | |||||||||
| Total other current assets | $ | 48,334 | $ | 41,044 | |||||||
| Other long-term assets: | |||||||||||
| Capitalized software, net | $ | 96,995 | $ | 94,027 | |||||||
| Unbilled receivables, net | 18,084 | 17,205 | |||||||||
| Deferred debt issuance costs | 3,156 | 4,253 | |||||||||
| Other long-term assets | 9,284 | 3,804 | |||||||||
| Total other long-term assets | $ | 127,519 | $ | 119,289 | |||||||
| Accrued liabilities: | |||||||||||
| Operating lease liabilities, current portion | $ | 12,947 | $ | 12,197 | |||||||
| Customer fund liabilities | 31,727 | 18,164 | |||||||||
| Advance payments from customers | 8,191 | 6,981 | |||||||||
| Rebates and lease buyouts | 44,644 | 21,815 | |||||||||
| Group purchasing organization fees | 7,115 | 4,412 | |||||||||
| Taxes payable | 3,771 | 3,520 | |||||||||
| Other accrued liabilities | 24,772 | 13,222 | |||||||||
| Total accrued liabilities | $ | 133,167 | $ | 80,311 | |||||||
| December 31, | |||||||
| 2018 | 2017 | ||||||
| (In thousands) | |||||||
| Inventories: | |||||||
| Raw materials | $ | 32,511 | $ | 31,275 | |||
| Work in process | 8,726 | 8,718 | |||||
| Finished goods | 59,631 | 56,144 | |||||
| Total inventories | $ | 100,868 | $ | 96,137 | |||
| Property and equipment: | |||||||
| Equipment | $ | 75,417 | $ | 69,550 | |||
| Furniture and fixtures | 7,844 | 6,534 | |||||
| Leasehold improvements | 16,274 | 10,976 | |||||
| Software | 42,048 | 37,168 | |||||
| Construction in progress | 10,706 | 9,813 | |||||
| Property and equipment, gross | 152,289 | 134,041 | |||||
| Accumulated depreciation and amortization | (100,789 | ) | (91,446 | ) | |||
| Total property and equipment, net | $ | 51,500 | $ | 42,595 | |||
| Other long-term assets: | |||||||
| Capitalized software, net | $ | 56,819 | $ | 38,599 | |||
| Unbilled receivables | 16,481 | 9,475 | |||||
| Other assets | 1,313 | 1,242 | |||||
| Total other long-term assets, net | $ | 74,613 | $ | 49,316 | |||
| Accrued liabilities: | |||||||
| Advance payments from customers | $ | 8,993 | $ | 7,779 | |||
| Rebates and lease buyouts | 11,076 | 5,428 | |||||
| Group purchasing organization fees | 4,455 | 3,449 | |||||
| Taxes payable | 5,885 | 9,183 | |||||
| Other accrued liabilities | 12,638 | 9,854 | |||||
| Total accrued liabilities | $ | 43,047 | $ | 35,693 | |||
(1) Includes restricted cash of $6.6 million and $4.0 million as of December 31, 2021 and 2020, respectively.
The following table summarizes the changes in accumulated balances of other comprehensive income (loss), which consisted of foreign currency translation adjustments, for the years ended December 31, 20182021 and December 31, 2017:2020:
| Foreign currency translation adjustments | Unrealized gain (loss) on interest rate swap hedges | Total | |||||||||
| (In thousands) | |||||||||||
| Balance as of December 31, 2016 | $ | (10,764 | ) | $ | 1,245 | $ | (9,519 | ) | |||
| Other comprehensive income (loss) before reclassifications | 3,810 | 409 | 4,219 | ||||||||
| Amounts reclassified from other comprehensive income (loss) | — | (813 | ) | (813 | ) | ||||||
| Net current-period other comprehensive income (loss), net of tax | 3,810 | (404 | ) | 3,406 | |||||||
| Balance as of December 31, 2017 | (6,954 | ) | 841 | (6,113 | ) | ||||||
| Other comprehensive income (loss) before reclassifications | (4,320 | ) | 777 | (3,543 | ) | ||||||
| Amounts reclassified from other comprehensive income (loss), net of tax | — | (1,198 | ) | (1,198 | ) | ||||||
| Net current-period other comprehensive income (loss), net of tax | (4,320 | ) | (421 | ) | (4,741 | ) | |||||
| Balance as of December 31, 2018 | $ | (11,274 | ) | $ | 420 | $ | (10,854 | ) | |||
| December 31, | |||||||
| 2018 | 2017 | ||||||
| (In thousands) | |||||||
| Net minimum lease payments to be received | $ | 28,295 | $ | 25,899 | |||
| Less: unearned interest income portion | (2,477 | ) | (1,695 | ) | |||
| Net investment in sales-type leases | 25,818 | 24,204 | |||||
Less: short-term portion(1) | (8,736 | ) | (8,769 | ) | |||
| Long-term net investment in sales-type leases | $ | 17,082 | $ | 15,435 | |||
| (In thousands) | ||||||||||||||||||||
| Balance as of | $ | (9,446) | ||||||||||||||||||
| Other comprehensive income | 3,924 | |||||||||||||||||||
| Balance | (5,522) | |||||||||||||||||||
| Other comprehensive loss | (2,885) | |||||||||||||||||||
| Balance as of December 31, 2021 | $ | (8,407) | ||||||||||||||||||