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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
| | | | | |
| (Mark One) | |
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
| | | | | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File No. 000-33043
OMNICELL, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
| Delaware | 94-3166458 |
(State or other jurisdiction of
incorporation or organization) | (IRS Employer
Identification No.) |
590 East Middlefield Road
Mountain View, CA 94043
(Address of registrant’s principal executive offices, including zip code)
(650) 251-6100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of each class | | Trading Symbol | | Name of each exchange on which registered |
| Common Stock, $0.001 par value | | OMCL | | NASDAQ Global Select Market |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Large Accelerated Filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
| | | | | | | | | |
| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitions period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | | | ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ý
As of October 23, 2020, there were 42,307,178 shares of the registrant’s common stock, $0.001 par value, outstanding.
OMNICELL, INC.
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | | |
| (In thousands, except par value) |
| ASSETS |
| Current assets: | | | |
| Cash and cash equivalents | $ | 629,171 | | | $ | 127,210 | |
Accounts receivable and unbilled receivables, net of allowances of $3,839 and $3,227, respectively | 188,102 | | | 218,362 | |
| Inventories | 103,101 | | | 108,011 | |
| Prepaid expenses | 20,399 | | | 14,478 | |
| Other current assets | 22,631 | | | 15,177 | |
| Total current assets | 963,404 | | | 483,238 | |
| Property and equipment, net | 57,559 | | | 54,246 | |
| Long-term investment in sales-type leases, net | 22,510 | | | 19,750 | |
| Operating lease right-of-use assets | 50,415 | | | 56,130 | |
| Goodwill | 336,456 | | | 336,539 | |
| Intangible assets, net | 111,587 | | | 124,867 | |
| Long-term deferred tax assets | 14,985 | | | 14,142 | |
| Prepaid commissions | 46,649 | | | 48,862 | |
| Other long-term assets | 115,712 | | | 103,036 | |
| Total assets | $ | 1,719,277 | | | $ | 1,240,810 | |
| | | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY |
| Current liabilities: | | | |
| Accounts payable | $ | 37,203 | | | $ | 46,380 | |
| Accrued compensation | 35,778 | | | 44,155 | |
| Accrued liabilities | 59,254 | | | 55,567 | |
| | | |
| Deferred revenues, net | 101,641 | | | 90,894 | |
| Total current liabilities | 233,876 | | | 236,996 | |
| Long-term deferred revenues | 5,163 | | | 7,083 | |
| Long-term deferred tax liabilities | 35,584 | | | 39,090 | |
| Long-term operating lease liabilities | 44,365 | | | 50,669 | |
| Other long-term liabilities | 19,775 | | | 11,718 | |
| Revolving credit facility | — | | | 50,000 | |
| Convertible senior notes, net | 462,115 | | | — | |
| Total liabilities | 800,878 | | | 395,556 | |
| Commitments and contingencies (Note 12) | | | |
| 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; 52,168 and 51,277 shares issued; 42,274 and 42,132 shares outstanding, respectively | 52 | | | 51 | |
Treasury stock at cost, 9,894 and 9,145 shares outstanding, respectively | (238,109) | | | (185,074) | |
| Additional paid-in capital | 892,290 | | | 780,931 | |
| Retained earnings | 274,345 | | | 258,792 | |
| Accumulated other comprehensive loss | (10,179) | | | (9,446) | |
| Total stockholders’ equity | 918,399 | | | 845,254 | |
| Total liabilities and stockholders’ equity | $ | 1,719,277 | | | $ | 1,240,810 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (In thousands, except per share data) |
| Revenues: | | | | | | | |
| Product revenues | $ | 151,337 | | | $ | 168,488 | | | $ | 460,352 | | | $ | 472,477 | |
| Services and other revenues | 62,362 | | | 60,317 | | | 182,654 | | | 176,258 | |
| Total revenues | 213,699 | | | 228,805 | | | 643,006 | | | 648,735 | |
| Cost of revenues: | | | | | | | |
| Cost of product revenues | 86,689 | | | 86,695 | | | 262,740 | | | 250,089 | |
| Cost of services and other revenues | 30,219 | | | 29,963 | | | 90,628 | | | 85,337 | |
| Total cost of revenues | 116,908 | | | 116,658 | | | 353,368 | | | 335,426 | |
| Gross profit | 96,791 | | | 112,147 | | | 289,638 | | | 313,309 | |
| Operating expenses: | | | | | | | |
| Research and development | 15,197 | | | 16,625 | | | 54,679 | | | 49,551 | |
| Selling, general, and administrative | 71,442 | | | 70,876 | | | 219,647 | | | 207,588 | |
| | | | | | | |
| Total operating expenses | 86,639 | | | 87,501 | | | 274,326 | | | 257,139 | |
| Income from operations | 10,152 | | | 24,646 | | | 15,312 | | | 56,170 | |
| Interest and other income (expense), net | 809 | | | (1,168) | | | 161 | | | (4,207) | |
| Income before provision for income taxes | 10,961 | | | 23,478 | | | 15,473 | | | 51,963 | |
| Provision for (benefit from) income taxes | 2,156 | | | 3,495 | | | (344) | | | 12,720 | |
| Net income | $ | 8,805 | | | $ | 19,983 | | | $ | 15,817 | | | $ | 39,243 | |
| Net income per share: | | | | | | | |
| Basic | $ | 0.21 | | | $ | 0.48 | | | $ | 0.37 | | | $ | 0.95 | |
| | | | | | | |
| Diluted | $ | 0.20 | | | $ | 0.46 | | | $ | 0.36 | | | $ | 0.92 | |
| Weighted-average shares outstanding: | | | | | | | |
| Basic | 42,802 | | | 41,771 | | | 42,606 | | | 41,283 | |
| Diluted | 43,691 | | | 43,052 | | | 43,651 | | | 42,796 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (In thousands) |
| Net income | $ | 8,805 | | | $ | 19,983 | | | $ | 15,817 | | | $ | 39,243 | |
| Other comprehensive income (loss), net of reclassification adjustments and taxes: | | | | | | | |
| Unrealized losses on interest rate swap contracts | — | | | — | | | — | | | (420) | |
| Foreign currency translation adjustments | 3,510 | | | (2,825) | | | (733) | | | (3,127) | |
| Other comprehensive income (loss) | 3,510 | | | (2,825) | | | (733) | | | (3,547) | |
| Comprehensive income | $ | 12,315 | | | $ | 17,158 | | | $ | 15,084 | | | $ | 35,696 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional
Paid-In Capital | | Accumulated
Earnings | | Accumulated Other
Comprehensive Income (Loss) | | Stockholders’
Equity |
| Shares | | Amount | | Shares | | Amount | | | |
| | | | | | | | | | | | | | | |
| (In thousands) |
| Balances as of December 31, 2019 | 51,277 | | | $ | 51 | | | (9,145) | | | $ | (185,074) | | | $ | 780,931 | | | $ | 258,792 | | | $ | (9,446) | | | $ | 845,254 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 11,311 | | | — | | | 11,311 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (4,694) | | | (4,694) | |
| | | | | | | | | | | | | | | |
| Share-based compensation | — | | | — | | | — | | | — | | | 10,659 | | | — | | | — | | | 10,659 | |
| Issuance of common stock under employee stock plans | 474 | | | 1 | | | — | | | — | | | 17,658 | | | — | | | — | | | 17,659 | |
| Tax payments related to restricted stock units | — | | | — | | | — | | | — | | | (1,425) | | | — | | | — | | | (1,425) | |
| Cumulative effect of a change in accounting principle related to credit losses | — | | | — | | | — | | | — | | | — | | | (264) | | | — | | | (264) | |
| Balances as of March 31, 2020 | 51,751 | | | 52 | | | (9,145) | | | (185,074) | | | 807,823 | | | 269,839 | | | (14,140) | | | 878,500 | |
| Net loss | — | | | — | | | — | | | — | | | — | | | (4,299) | | | — | | | (4,299) | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 451 | | | 451 | |
| | | | | | | | | | | | | | | |
| Share-based compensation | — | | | — | | | — | | | — | | | 11,351 | | | — | | | — | | | 11,351 | |
| Issuance of common stock under employee stock plans | 151 | | | — | | | — | | | — | | | 3,503 | | | — | | | — | | | 3,503 | |
| Tax payments related to restricted stock units | — | | | — | | | — | | | — | | | (2,045) | | | — | | | — | | | (2,045) | |
| Balances as of June 30, 2020 | 51,902 | | | 52 | | | (9,145) | | | (185,074) | | | 820,632 | | | 265,540 | | | (13,689) | | | 887,461 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 8,805 | | | — | | | 8,805 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 3,510 | | | 3,510 | |
| | | | | | | | | | | | | | | |
| Share-based compensation | — | | | — | | | — | | | — | | | 11,024 | | | — | | | — | | | 11,024 | |
| Issuance of common stock under employee stock plans | 266 | | | — | | | — | | | — | | | 12,064 | | | — | | | — | | | 12,064 | |
| Tax payments related to restricted stock units | — | | | — | | | — | | | — | | | (631) | | | — | | | — | | | (631) | |
| 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 | |
| Balances as of September 30, 2020 | 52,168 | | | $ | 52 | | | (9,894) | | | $ | (238,109) | | | $ | 892,290 | | | $ | 274,345 | | | $ | (10,179) | | | $ | 918,399 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED) - CONTINUED
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock | | Additional
Paid-In Capital | | Accumulated
Earnings | | Accumulated Other
Comprehensive Income (Loss) | | Stockholders’
Equity |
| Shares | | Amount | | Shares | | Amount | | | | |
| | | | | | | | | | | | | | | |
| (In thousands) |
| Balances as of December 31, 2018 | 49,480 | | | $ | 50 | | | (9,145) | | | $ | (185,074) | | | $ | 678,041 | | | $ | 197,454 | | | $ | (10,854) | | | $ | 679,617 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 3,284 | | | — | | | 3,284 | |
| Other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | 352 | | | 352 | |
| At the market equity offering, net of costs | 243 | | | — | | | — | | | — | | | 20,216 | | | — | | | — | | | 20,216 | |
| Share-based compensation | — | | | — | | | — | | | — | | | 8,410 | | | — | | | — | | | 8,410 | |
| Issuance of common stock under employee stock plans | 628 | | | — | | | — | | | — | | | 20,526 | | | — | | | — | | | 20,526 | |
| Tax payments related to restricted stock units | — | | | — | | | — | | | — | | | (1,920) | | | — | | | — | | | (1,920) | |
| Balances as of March 31, 2019 | 50,351 | | | 50 | | | (9,145) | | | (185,074) | | | 725,273 | | | 200,738 | | | (10,502) | | | 730,485 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 15,976 | | | — | | | 15,976 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (1,074) | | | (1,074) | |
| At the market equity offering, net of costs | 217 | | | — | | | — | | | — | | | 17,590 | | | — | | | — | | | 17,590 | |
| Share-based compensation | — | | | — | | | — | | | — | | | 8,260 | | | — | | | — | | | 8,260 | |
| Issuance of common stock under employee stock plans | 216 | | | 1 | | | — | | | — | | | 4,806 | | | — | | | — | | | 4,807 | |
| Tax payments related to restricted stock units | — | | | — | | | — | | | — | | | (2,802) | | | — | | | — | | | (2,802) | |
| Balances as of June 30, 2019 | 50,784 | | | 51 | | | (9,145) | | | (185,074) | | | 753,127 | | | 216,714 | | | (11,576) | | | 773,242 | |
| Net income | — | | | — | | | — | | | — | | | — | | | 19,983 | | | — | | | 19,983 | |
| Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | — | | | (2,825) | | | (2,825) | |
| Share-based compensation | — | | | — | | | — | | | — | | | 8,505 | | | — | | | — | | | 8,505 | |
| Issuance of common stock under employee stock plans | 266 | | | — | | | — | | | — | | | 9,696 | | | — | | | — | | | 9,696 | |
| Tax payments related to restricted stock units | — | | | — | | | — | | | — | | | (1,068) | | | — | | | — | | | (1,068) | |
| Balances as of September 30, 2019 | 51,050 | | | $ | 51 | | | (9,145) | | | $ | (185,074) | | | $ | 770,260 | | | $ | 236,697 | | | $ | (14,401) | | | $ | 807,533 | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| | | |
| (In thousands) |
| Operating Activities | | | |
| Net income | $ | 15,817 | | | $ | 39,243 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| Depreciation and amortization | 43,903 | | | 39,525 | |
| Loss on disposal of property and equipment | — | | | 436 | |
| | | |
| | | |
| | | |
| Share-based compensation expense | 33,034 | | | 25,175 | |
| | | |
| | | |
| | | |
| Deferred income taxes | (3,643) | | | 4,023 | |
| Amortization of operating lease right-of-use assets | 7,692 | | | 7,917 | |
| Amortization of debt issuance costs | 754 | | | 1,718 | |
| Amortization of discount on convertible senior notes | 249 | | | — | |
| Changes in operating assets and liabilities: | | | |
| Accounts receivable and unbilled receivables | 29,653 | | | (7,716) | |
| Inventories | 4,570 | | | (7,015) | |
| Prepaid expenses | (6,272) | | | (1,341) | |
| Other current assets | (6,617) | | | 974 | |
| Investment in sales-type leases | (3,273) | | | (5,120) | |
| Prepaid commissions | 2,213 | | | 909 | |
| Other long-term assets | (4,023) | | | 3,944 | |
| Accounts payable | (8,659) | | | 10,316 | |
| Accrued compensation | (8,377) | | | (8,161) | |
| Accrued liabilities | 3,281 | | | 5,262 | |
| Deferred revenues | 8,827 | | | 3,900 | |
| Operating lease liabilities | (7,764) | | | (7,887) | |
| Other long-term liabilities | 8,057 | | | 4,086 | |
| Net cash provided by operating activities | 109,422 | | | 110,188 | |
| Investing Activities | | | |
| | | |
| Software development for external use | (25,909) | | | (34,129) | |
| Purchases of property and equipment | (17,265) | | | (12,632) | |
| | | |
| Net cash used in investing activities | (43,174) | | | (46,761) | |
| Financing Activities | | | |
| Proceeds from revolving credit facility | 150,000 | | | — | |
| Repayment of debt and revolving credit facility | (200,000) | | | (60,000) | |
| Payments for debt issuance costs for revolving credit facility | (550) | | | — | |
| 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 | 33,226 | | | 35,029 | |
| Employees’ taxes paid related to restricted stock units | (4,101) | | | (5,790) | |
| Stock repurchases | (53,035) | | | — | |
| Net cash provided by financing activities | 435,870 | | | 7,045 | |
| Effect of exchange rate changes on cash and cash equivalents | (157) | | | (387) | |
| Net increase in cash and cash equivalents | 501,961 | | | 70,085 | |
| Cash and cash equivalents at beginning of period | 127,210 | | | 67,192 | |
| Cash and cash equivalents at end of period | $ | 629,171 | | | $ | 137,277 | |
| | | |
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| | | |
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The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - CONTINUED
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2020 | | 2019 |
| | | |
| (In thousands) |
| | | |
| | | |
| | | |
| | | |
| Supplemental disclosure of non-cash activities | | | |
| Unpaid purchases of property and equipment | $ | 319 | | | $ | 756 | |
| Transfers between inventory and property and equipment, net | $ | — | | | $ | 1,549 | |
| Transfers from prepaid expenses to property and equipment | $ | — | | | $ | 3,313 | |
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 1,559 | | | $ | 957 | |
| | | |
| | | |
The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.
OMNICELL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Organization and Summary of Significant Accounting Policies
Business
Omnicell, Inc. was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. The Company’s major products are medication management automation solutions and adherence tools for healthcare systems and pharmacies, which are sold in its principal market, the healthcare industry. The Company’s market is primarily located in the United States and Europe. “Omnicell” or the “Company” collectively refer to Omnicell, Inc. and its subsidiaries.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of the Company as of September 30, 2020 and December 31, 2019, the results of operations and comprehensive income for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 26, 2020, except as discussed in the sections entitled “Allowance for Credit Losses” and “Recently Adopted Authoritative Guidance” below. The Company’s results of operations and comprehensive income for the three and nine months ended September 30, 2020 and cash flows for the nine months ended September 30, 2020 are not necessarily indicative of results that may be expected for the year ending December 31, 2020, or for any future period.
Principles of Consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications and Adjustments
Certain prior-year amounts have been reclassified to conform with current-period presentation. This reclassification was a change in the presentation of certain items in the disaggregation of product revenues for the three and nine months ended September 30, 2019 in Note 2, Revenues. This change was not deemed material and was included to conform with current-period classification and presentation.
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 Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable, including any potential impacts arising from the novel coronavirus (“COVID-19”) pandemic. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates.
The Company’s critical accounting policies are those that affect its financial statements materially and involve difficult, subjective or complex judgments by management. As of September 30, 2020, 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. Given the ongoing uncertainty surrounding the COVID-19 pandemic, events or circumstances may arise that could result in a change in estimates, judgments, or revisions to the carrying value of the Company’s assets or liabilities.
Segment Reporting
The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions. The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company at the consolidated level using information about its revenues, gross profit, income from operations, and other key financial data. All significant operating decisions are based upon an analysis of the Company as one operating segment, which is the same as its reporting segment.
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 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 Condensed Consolidated Balance Sheets as a deduction from the respective asset balance. The following table summarizes the Company’s allowance for credit losses by asset type:
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| September 30,
2020 | | December 31,
2019 |
| | | |
| (In thousands) |
| Allowance for credit losses: | | | |
| Accounts receivable and unbilled receivables | $ | 3,839 | | | $ | 3,227 | |
Long-term unbilled receivables (1) | 30 | | | — | |
Net investment in sales-type leases (2) | 269 | | | 225 | |
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(1) Included in other long-term assets in the Condensed Consolidated Balance Sheets.
(2) Includes both current and long-term portions presented in other current assets and long-term investment in sales-type leases, net, respectively.
Changes in the allowances were not significant for the three and nine months ended September 30, 2020 and 2019.
Recently Adopted Authoritative Guidance
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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). The Company adopted ASU 2018-15 on January 1, 2020 on a prospective basis. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, that modifies or replaces existing models for trade and other receivables, debt securities, loans, and certain other financial instruments. For instruments measured at amortized cost, including trade and lease receivables, loans, and held-to-maturity debt securities, the standard replaced the current “incurred loss” approach with an “expected loss” model. Entities are required to estimate expected credit losses over the life of the instrument, considering available relevant information about the collectibility of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The Company adopted the new standard on January 1, 2020 using the modified retrospective transition method, which resulted in the recognition of an immaterial cumulative-effect adjustment to retained earnings.
Recently Issued Authoritative Guidance
In 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. This update permits the use of either the modified retrospective or fully retrospective method of transition. ASU 2020-06 will be effective for the Company beginning January 1, 2022. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the impact ASU 2020-06 will have on its Condensed Consolidated Financial Statements.
There was no other recently issued and effective authoritative guidance that is expected to have a material impact on the Company’s Condensed Consolidated Financial Statements through the reporting date.
Note 2. Revenues
Revenue Recognition
The Company earns revenues from sales of its products and related services, which are sold in the healthcare industry, its principal market. The Company’s customer arrangements typically include one or more of the following performance obligations:
Products. Software-enabled equipment that manages and regulates the storage and dispensing of pharmaceuticals, consumable blister cards and packaging equipment and other medical supplies.
Software. On premise or cloud-based subscription solutions that improve medication management and adherence outcomes or enable incremental functionality of the Company’s equipment.
Installation. Installation of equipment as integrated systems at customer sites.
Post-installation technical support. Phone support, on-site service, parts, and access to unspecified software updates and enhancements, if and when available.
Professional services. Other customer services, such as technology-enabled services, training, and consulting.
A portion of the Company’s sales are made to customers who are members of Group Purchasing Organizations (“GPOs”). 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 considers these fees consideration paid to customers and records them as reductions to revenue. Fees to GPOs were $2.3 million and $2.8 million for the three months ended September 30, 2020 and 2019, respectively, and $6.9 million and $7.6 million for the nine months ended September 30, 2020 and 2019, respectively.
Disaggregation of Revenues
The following table summarizes the Company’s product revenues disaggregated by revenue type for the three and nine months ended September 30, 2020 and 2019:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (In thousands) |
| | | | | | | |
| Hardware and software | $ | 130,046 | | | $ | 142,424 | | | $ | 389,398 | | | $ | 394,243 | |
| Consumables | 16,840 | | | 22,204 | | | 58,173 | | | 67,706 | |
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| Other | 4,451 | | | 3,860 | | | 12,781 | | | 10,528 | |
| Total product revenues | $ | 151,337 | | | $ | 168,488 | | | $ | 460,352 | | | $ | 472,477 | |
The following table summarizes the Company’s revenues disaggregated by geographic region, which is determined based on customer location, for the three and nine months ended September 30, 2020 and 2019:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (In thousands) |
| United States | $ | 193,639 | | | $ | 206,709 | | | $ | 579,425 | | | $ | 582,540 | |
Rest of world (1) | 20,060 | | | 22,096 | | | 63,581 | | | 66,195 | |
| Total revenues | $ | 213,699 | | | $ | 228,805 | | | $ | 643,006 | | | $ | 648,735 | |
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(1) No individual country represented more than 10% of total revenues.
Contract Assets and Contract Liabilities
The following table reflects the Company’s contract assets and contract liabilities:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | | |
| (In thousands) |
Short-term unbilled receivables, net (1) | $ | 8,344 | | | $ | 11,707 | |
Long-term unbilled receivables, net (2) | 15,379 | | | 12,260 | |
| Total contract assets | $ | 23,723 | | | $ | 23,967 | |
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| Short-term deferred revenues, net | $ | 101,641 | | | $ | 90,894 | |
| Long-term deferred revenues | 5,163 | | | 7,083 | |
| Total contract liabilities | $ | 106,804 | | | $ | 97,977 | |
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(1) Included in accounts receivable and unbilled receivables in the Condensed Consolidated Balance Sheets.
(2) Included in other long-term assets in the Condensed Consolidated Balance Sheets.
The portion of the transaction price allocated to the Company’s unsatisfied performance obligations for which invoicing has occurred is recorded as deferred revenues.
Short-term deferred revenues of $101.6 million and $90.9 million include deferred revenues from product sales and service contracts, net of deferred cost of sales of $24.2 million and $13.1 million, as of September 30, 2020 and December 31, 2019, respectively. The short-term deferred revenues from product sales relate to delivered and invoiced products, pending installation and acceptance, expected to occur within the next twelve months. During the three and nine months ended September 30, 2020, the Company recognized revenues of $13.2 million and $77.5 million, respectively, that were included in the corresponding gross short-term deferred revenues balance of $104.0 million as of December 31, 2019.
Long-term deferred revenues include deferred revenues from service contracts of $5.2 million and $7.1 million as of September 30, 2020 and December 31, 2019, respectively. 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.
Significant Customers
There were no customers that accounted for more than 10% of the Company’s total revenues for the three and nine months ended September 30, 2020 and 2019. Also, there were no customers that accounted for more than 10% of the Company’s accounts receivable balance as of September 30, 2020 and December 31, 2019.
Note 3. Net Income Per Share
Basic net income per share is computed by dividing net income for the period by the weighted-average number of shares outstanding during the period. In periods of net loss, all potential common shares are anti-dilutive, so diluted net loss per share equals the basic net loss per share. In periods of net income, diluted net income per share is computed by dividing net income for the period by the basic weighted-average number of shares plus any dilutive potential common stock outstanding during the period, using the treasury stock method. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards, and restricted stock units, as well as shares the Company could be obligated to issue from its convertible senior notes and warrants, as described in Note 9, 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.
The basic and diluted net income per share calculations for the three and nine months ended September 30, 2020 and 2019 were as follows:
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| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2020 | | 2019 | | 2020 | | 2019 |
| | | | | | | |
| (In thousands, except per share data) |
| Net income | $ | 8,805 | | | $ | 19,983 | | | $ | 15,817 | | | $ | 39,243 | |
| Weighted-average shares outstanding - basic | 42,802 | | | 41,771 | | | 42,606 | | | 41,283 | |
| Effect of dilutive securities from stock award plans | 889 | | | 1,281 | | | 1,045 | | | 1,513 | |
| Effect of dilutive convertible senior notes and warrants | — | | | — | | | — | | | — | |
| Weighted-average shares outstanding - diluted | 43,691 | | | 43,052 | | | 43,651 | | | 42,796 | |
| | | | | | | |
| | | | | | | |
| Net income per share - basic | $ | 0.21 | | | $ | 0.48 | | | $ | 0.37 | | | $ | 0.95 | |
| Net income per share - diluted | $ | 0.20 | | | $ | 0.46 | | | $ | 0.36 | | | $ | 0.92 | |
| | | | | | | |
| Anti-dilutive weighted-average shares related to stock award plans | 2,328 | | | 1,060 | | | 2,076 | | | 832 | |
| Anti-dilutive weighted-average shares related to convertible senior notes and warrants | 11,816 | | | — | | | 11,816 | | | — | |
Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $629.2 million and $127.2 million as of September 30, 2020 and December 31, 2019, respectively, consisted of bank accounts with major financial institutions.
Fair Value Hierarchy
The Company measures its financial instruments at fair value. The Company’s cash and cash equivalents are classified within Level 1 of the fair value hierarchy as they are valued primarily using quoted market prices utilizing market observable inputs. The Company's interest rate swap contracts and credit facilities are classified within Level 2 as the valuation inputs are based on quoted prices or market observable data of similar instruments. The Company's convertible senior notes are classified within Level 2 as the valuation inputs are based on quoted prices in an inactive market on the last day in the reporting period. As of September 30, 2020, the fair value of the convertible senior notes was $592.2 million, compared to their carrying value of $462.1 million, which is net of unamortized discount and debt issuance costs and excludes amounts classified within additional paid-in capital. Refer to Note 8, Debt and Credit Agreements, for further information regarding the Company’s credit facilities and Note 9, Convertible Senior Notes for further information regarding the Company’s convertible senior notes.
Interest Rate Swap Contracts
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.
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 matured on April 30, 2019. The swap agreement required the Company to pay a fixed rate of 0.8% and provided that the Company received a variable rate based on the one month London Interbank Offered Rate (“LIBOR”), subject to a LIBOR floor of 0.0%. Amounts payable by or due to the Company were net settled with the respective counterparty on the last business day of each month, commencing July 31, 2016.
Note 5. Balance Sheet Components
Balance sheet details as of September 30, 2020 and December 31, 2019 are presented in the tables below:
| | | | | | | | | | | |
| September 30,
2020 | | December 31,
2019 |
| | | |
| (In thousands) |
| Inventories: | | | |
| Raw materials | $ | 29,994 | | | $ | 31,331 | |
| Work in process | 7,057 | | | 7,620 | |
| Finished goods | 66,050 | | | 69,060 | |
| Total inventories | $ | 103,101 | | | $ | 108,011 | |
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| Other long-term assets: | | | |
| Capitalized software, net | $ | 93,929 | | | $ | 85,070 | |
| Unbilled receivables, net | 15,379 | | | 12,260 | |
| Deferred debt issuance costs | 4,527 | | | 4,700 | |
| Other assets | 1,877 | | | 1,006 | |
| Total other long-term assets | $ | 115,712 | | | $ | 103,036 | |
| | | |
| Accrued liabilities: | | | |
| Operating lease liabilities, current portion | $ | 10,633 | | | $ | 10,058 | |
| Advance payments from customers | 6,277 | | | 4,006 | |
| Rebates and lease buyouts | 21,346 | | | 14,911 | |
| Group purchasing organization fees | 4,211 | | | 5,934 | |
| Taxes payable | 3,105 | | | 3,744 | |
| Other accrued liabilities | 13,682 | | | 16,914 | |
| Total accrued liabilities | $ | 59,254 | | | $ | 55,567 | |
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The following tables summarize the changes in accumulated balances of other comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019: