# Omnicell, Inc.: Form 10-Q for the period ended Sep 30, 2023

- Company: [Omnicell, Inc.](/companies/omcl.md) (CIK 926326)
- Form: 10-Q
- Filed: 2023-11-03
- Accepted by EDGAR: Nov 3, 2023, 16:11 ET
- Period: 2023-09-30
- Accession: 0000926326-23-000041
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/926326/000092632623000041/omcl-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/926326/000092632623000041/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-07-01 to 2023-09-30 | $298.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2023-01-01 to 2023-09-30 | $888.3m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-07-01 to 2023-09-30 | $166.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2023-01-01 to 2023-09-30 | $496.8m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-07-01 to 2023-09-30 | $132.0m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2023-01-01 to 2023-09-30 | $391.4m | us-gaap:GrossProfit |
| Research and development | 3 months, 2023-07-01 to 2023-09-30 | $24.3m | us-gaap:ResearchAndDevelopmentExpense |
| Research and development | 9 months, 2023-01-01 to 2023-09-30 | $70.3m | us-gaap:ResearchAndDevelopmentExpense |
| Selling, general and administrative | 3 months, 2023-07-01 to 2023-09-30 | $104.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2023-01-01 to 2023-09-30 | $332.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-07-01 to 2023-09-30 | $3.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2023-01-01 to 2023-09-30 | −$11.5m | us-gaap:OperatingIncomeLoss |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $4.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $5.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | −$6.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.13 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $0.12 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | −$0.13 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 45,595,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 45,117,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $142.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $32.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $446.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-09-30 | $913.8m | us-gaap:AssetsCurrent |
| Total assets | at 2023-09-30 | $2.22bn | us-gaap:Assets |
| Current liabilities | at 2023-09-30 | $369.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-09-30 | $1.03bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $1.19bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 54,311 characters.

### FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

*This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The forward-looking statements are contained throughout this Quarterly Report on Form 10-Q including in the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include, but are not limited to, statements about:*

- *our expectations regarding our future sales pipeline and bookings;*
- *the extent and timing of future revenues, including the amounts of our current backlog;*
- *the size or growth of our market or market share;*
- *our beliefs about drivers of demand for our products, services, and solutions, opportunities in certain market categories, and continued expansion in these market categories, as well as our belief that our technology, services, and solutions within these market categories position us well to address the needs of retail, acute, post-acute, and specialty pharmacy providers;*
- *continued investment in the industry vision of the Autonomous Pharmacy, our beliefs about the anticipated benefits of such investments, and our expectations regarding continued growth in current and future subscription and cloud-based offerings as we execute on this vision;*
- *our goal of advancing our platform with the development of new products, services, or solutions or the enhancement of existing products, services, or solutions;*
- *growth opportunities presented by new products, services, solutions, and markets;*
- *our projected target revenues, operating costs, and cash flows;*
- *our ability to align our intelligent infrastructure development and global workforce headcount with our current business expectations;*
- *our goal to deliver on the industry vision of the Autonomous Pharmacy, as well as our plan to migrate our customers from an on-premise infrastructure to our cloud-based platform;*
- *our belief that our solutions that support the industry vision of the Autonomous Pharmacy, are strongly aligned with trends in the healthcare market, and are well-positioned to address the evolving needs of healthcare institutions;*
- *our expectation to continue to acquire companies, businesses, products, services, or technologies and to effectively integrate or manage these acquired companies, businesses, products, services, or technologies;*
- *our ability to secure adequate supplies of raw materials and components utilized in the manufacture of our products of a quality that we require, on a timely basis, and at acceptable prices;*
- *our containment of the impacts of the ransomware incident we experienced in May 2022, and any further impacts on the Company, including its business, operating results, cash flow, or financial condition;*
- *our expected future uses of cash and the sufficiency of our sources of funding;*
- *our ability to generate cash from operations and our estimates regarding the sufficiency of our cash resources; and*
- *our expectations about the impact of epidemics, pandemics, or other major public health crises, such as the COVID-19 pandemic, and the associated containment measures, on our workforce and operations as well as those of our customers and suppliers, and the effect on our business, operating results, cash flow, or financial condition.*

*In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “forecasts,” “goals,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “target,” “will,” “would,” and variations of these terms and similar expressions.*

*Forward-looking statements are based on our current expectations and assumptions, and are subject to known and unknown risks and uncertainties, many of which are beyond our control, which may cause our actual results, performance, or achievements to be materially different from those expressed or implied in the forward-looking statements. Such risks and uncertainties include those described throughout this Quarterly Report on Form 10-Q, including Part I - Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Part II - Item 1A. “Risk Factors,” as well as in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the U.S. Securities and Exchange Commission (“SEC”) on March 1, 2023. Given these risks and uncertainties, you are cautioned not to place undue reliance on these forward-looking statements. Forward-looking statements should be considered in light of these risks and uncertainties. You should carefully read this Quarterly Report on Form 10-Q and the documents that we reference in this Quarterly Report on Form 10-Q and have filed as exhibits, as well as other documents we file with, or furnish to, the SEC from time to time, with the understanding that our actual future results may be materially different from what we expect. The forward-looking statements in this Quarterly Report on Form 10-Q represent our current estimates and assumptions and speak only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those expressed or implied in any forward-looking statements, whether as a result of changed circumstances, future events, even if new information becomes available in the future, or otherwise.*

### Other Information

*All references in this Quarterly Report on Form 10-Q to “Omnicell,” “our,” “us,” “we,” or “the Company” collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries. The term “Omnicell, Inc.” refers only to Omnicell, Inc., excluding its subsidiaries.*

*We own various registered and unregistered trademarks and service marks used in our business, some of which appear in this Quarterly Report on Form 10-Q, including Omnicell®. This Quarterly Report on Form 10-Q may also include the trademarks and service marks of other companies. Such trademarks and service marks are the marks of their respective owners.*

### OVERVIEW

### Our Business

Omnicell, a leader in transforming the pharmacy care delivery model, is committed to solving the critical challenges inherent in medication management and elevating the role of clinicians within healthcare as an essential component of care delivery. Omnicell is focused on not only helping its customers optimize medication management in each setting of care, but also placing the patient at the center and helping its customers optimize medication management across all care settings from inpatient to outpatient. We are doing so with an industry-leading medication management intelligent infrastructure to equip and empower pharmacists and pharmacies with the ability to focus on clinical care rather than administrative tasks. This intelligent infrastructure provides the critical foundation for customers to realize the industry vision of the Autonomous Pharmacy, a vision defined by pharmacy leaders for improving operational efficiencies and ultimately targeting zero-error medication management.

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 and the United Kingdom leverage our innovative medication adherence and population health solutions to improve patient engagement and adherence to prescriptions, helping to reduce costly hospital readmissions. We sell our product and consumable solutions together with related service offerings. Revenues generated in the United States represented 91% of our total revenues for both the three months ended September 30, 2023 and 2022, and 88% and 90% for the nine months ended September 30, 2023 and 2022, respectively.

Over the past several years, our business has expanded from a single-point solution to a platform of products and services that will help to further advance the industry vision of the Autonomous Pharmacy. This expansion has resulted in larger deal sizes across multiple products, services, and implementations for customers and, we believe, more comprehensive, valuable, and enduring relationships. As our business evolves, we continue to evaluate the metrics and methods we use to measure the success of our business.

We utilize bookings as an indicator of the success of our business. We define bookings generally as: (i) the value of non-cancelable contracts for our connected devices, software products, and Advanced Services (although, for those Advanced Services contracts without a minimum commitment, bookings only include the amount of revenue that has been recognized once the services have been provided); and (ii) for our consumables, the value of orders placed through our Omnicell Storefront online platform or through written or telephonic orders. We typically exclude technical services and other less significant items ancillary to our products and services, such as freight revenue from bookings. As noted, the portfolio of products, solutions and services we offer has evolved. As a result, the ordering process for certain of our solutions has also evolved. For example, orders for certain of our solutions may not include a purchase order. Connected devices and software license bookings are recorded as revenue upon customer acceptance of the installation or receipt of goods. Revenues from Advanced Services bookings are recorded over the contractual term.

We generally provide installation planning and consulting as part of most connected device product sales, which is typically included in the initial price of the solution. To help ensure the maximum availability of our systems, our customers typically purchase technical services contracts (maintenance and support) in increments of one to five years. In addition to connected device product sales, we provide a range of services to our customers. We also provide Advanced Services such as Central Pharmacy Dispensing Service (service portion), IV Compounding Service (service portion), EnlivenHealth, Specialty Pharmacy Services, 340B solutions, Inventory Optimization Service, and other software solutions, which typically are provided over 2-7 years.

The following table summarizes each revenue category:

| Revenue Category | Revenue Type | Income Statement Classification | Included in Bookings |
| --- | --- | --- | --- |
| Connected devices, software licenses, and other | Nonrecurring | Product | Yes (1) |
| Consumables | Recurring | Product | Yes |
| Technical services | Recurring | Service | No |
| Advanced Services (2) (3) | Recurring | Service | Yes |

(1) Certain other insignificant revenue streams ancillary to our products and services, such as freight revenue, are not included in bookings.

(2) Includes Central Pharmacy Dispensing Service (service portion), IV Compounding Service (service portion), EnlivenHealth, Specialty Pharmacy Services, 340B solutions, Inventory Optimization Service, and other software solutions.

(3) For those Advanced Services contracts without a minimum commitment, bookings only include the amount of revenue that has been recognized once the services have been provided.

Our full-time employee headcount was approximately 3,890 and 4,230 on September 30, 2023 and December 31, 2022, respectively. The decrease in employee headcount reflects the impact of the restructuring plan announced in November 2022.

### Operating Segments

We manage our operations as a single segment for the purposes of assessing performance and making operating decisions. Our Chief Operating Decision Maker (“CODM”) is our Chief Executive Officer. The CODM allocates resources and evaluates the performance of Omnicell at the consolidated level using information about our revenues, gross profit, income from operations, and other key financial data. All significant operating decisions are based upon an analysis of Omnicell as one operating segment, which is the same as our reporting segment.

### Business Strategy

The U.S. spent a total of $633.5 billion on prescription drugs that accounted for 14% of National Health Expenditures in 2022, and prescription drugs impact the vast majority of patients in virtually all settings of care. We believe there are significant challenges facing the practice of pharmacy today including, but not limited to, labor shortages, medication errors, drug shortages, medication loss due to drug diversion, significant medication waste and expiration costs, a high level of manual processes, complexity around compliance requirements, high healthcare worker turnover rates affecting tenure and expertise, hospitalizations from adverse drug events in outpatient settings, high variability in outcomes, and limited inventory visibility. Each of these challenges can translate into a major economic impact for hospitals and health systems. We recognize that some of these challenges can create capital budget and labor constraints for our customers in the near-term that may impact the potential timing of contracting for, or implementing, our products, solutions, or services. However, we believe that over time these significant challenges to the practice of pharmacy should drive demand for increased digitization, visibility, and insights that our solutions are designed to enable. Because of this, we find that our solutions are well positioned to address the evolving needs of healthcare institutions and therefore present opportunities for growth over the long-term.

In an effort to address these challenges and deliver solutions to help drive positive medication management outcomes, we continue to make significant investments in our research and development efforts to further advance the industry vision of the Autonomous Pharmacy. Furthermore, we believe a combination of technology, expertise and intelligence is needed in each care setting and across the entire continuum of care. We are focused on delivering solutions to help our customers realize the industry vision of the Autonomous Pharmacy and drive positive medication management outcomes with outstanding customer experience through a mature channel in four market categories:

- **Point of Care.** As a market leader, we expect to continue expansion into this product market as customers increase the use of our dispensing systems in more areas within their hospitals. However, we recognize that the current macroeconomic environment, with significant labor constraints, may impact our customers’ considerations in the near term when determining to implement new workflows that may affect those same stressed labor pools. As our XT Series cabinet is largely through the replacement, upgrade, and expansion cycle of older models of automated dispensing systems, we are seeing demand moderate. Over time, we believe that should labor shortages continue to challenge the delivery of healthcare services, deploying solutions and workflows that are intended to save nursing time, such as our XT Series, will be essential. We also believe there is an opportunity for us to expand this offering and define a new standard for dispensing systems in perioperative settings. We believe our

current solutions within the Point of Care market and new innovation and services will continue to help customers drive improved outcomes.

- **Central Pharmacy and IV Compounding.** This market represents the beginning of the medication management process in acute care settings, and, we believe, it is a significant automation opportunity for high volumes of manual, repetitive, and error-prone processes that are often common in pharmacies today. Manual medication dispensing processes are usually labor intensive, error-prone, and may lead to excess medication waste and expirations for our healthcare partners. Automating the central pharmacy dispensing process should enable customers to reallocate pharmacy labor, enhance dispensing accuracy and patient safety, and reduce medication waste and expirations. Likewise, the manual compounding of sterile IV preparations can be error-prone and create significant patient safety risks, and outsourcing sterile IV compounding could lead to increased medication costs. As a result, we believe IV automation provides a significant opportunity to enhance patient safety and reduce costs. Because adoption of our Central Pharmacy and IV automation solution is still nascent, we believe that the implementation of new solutions (as well as upgrading older technology) will be accelerated by combining technology, expertise, and intelligence into a comprehensive offering that is designed to deliver improved outcomes. Despite the potential headwinds from the lack of clarity in the current regulatory environment for IV automation, we anticipate that these bundled solutions will become more critical as health systems continue to face labor shortages, increased financial pressure, and supply chain disruptions.
- **Specialty Pharmacy and 340B Program.** We believe that health systems will invest in more revenue-generating activities that are intended to improve patient outcomes by utilizing specialty pharmacies and the 340B Drug Pricing Program, which allow hospitals and health systems to stretch federal resources and expand patient access to healthcare by requiring manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to healthcare organizations. Specialty drugs are used for treatment of complex conditions and often require intensive patient management and specialized workflows for dispensing and care coordination. Specialty medications are projected to account for nearly 60% of U.S. total spending on medications, with total spending projected to be approximately $420 billion in 2025. Specialty pharmacies serve as the connection between patients, prescribing physicians, and payers and work to streamline access and adherence to these specialty drugs. We believe a solution that addresses start-up and managed services for health systems that is designed to optimize their specialty pharmacy programs and the related pharmaceutical aspects of patient care will help ensure continuity of care and should contribute to the revenue and profitability of those organizations. We believe that a fully optimized specialty pharmacy operation represents one of the largest economic opportunities for hospitals and health systems.
- **Retail, Institutional, and Payer.** We believe the Retail, Institutional, and Payer market represents a significant opportunity as healthcare evolves. A majority of all prescription drugs are distributed in non-hospital settings. The COVID-19 pandemic accelerated the shift of outpatient care from hospitals and physician offices to other, more convenient settings, such as retail pharmacies and the home (including through telehealth technologies). New technologies and updated state board regulations appear to be spurring innovation by retail pharmacies, which, combined with the move to value-based care, we believe will drive the adoption of solutions that are intended to help providers and payers engage patients in new ways that improve patient care, reduce the total cost of care, and lead to more profitable operations. Because of the complexity of relationships between payers and providers, as well as the large number of retail pharmacies, including a significant number of independent pharmacies, we believe a network of established relationships between payers, providers and pharmacies will also be important.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”). The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions.

We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements:

- Revenue recognition;
- Lessor leases;
- Allowance for credit losses;
- Inventory;
- Internal-use and external-use software development costs;
- Lessee leases;
- Valuation and impairment of goodwill and intangible assets;
- Business combinations;
- Share-based compensation; and
- Accounting for income taxes.

There were no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the nine months ended September 30, 2023 as compared to those disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2022, except as discussed in “Recently Adopted Authoritative Guidance” in Note 1, *Organization and Summary of Significant Accounting Policies*, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.

### Recently Issued Authoritative Guidance

Refer to “Recently Issued Authoritative Guidance” in Note 1, *Organization and Summary of Significant Accounting Policies*, of the Notes to Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position, and cash flows.

### RESULTS OF OPERATIONS

### Total Revenues

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues | $188,755 | $246,565 | $(57,810) | (23)% |
| Percentage of total revenues | 63% | 71% |  |  |
| Services and other revenues | 109,908 | 101,494 | 8,414 | 8% |
| Percentage of total revenues | 37% | 29% |  |  |
| Total revenues | $298,663 | $348,059 | $(49,396) | (14)% |

Product revenues represented 63% and 71% of total revenues for the three months ended September 30, 2023 and 2022, respectively. Product revenues decreased by $57.8 million, primarily due to lower volumes from our automated dispensing systems business primarily as a result of ongoing health systems capital budget and labor constraints.

Services and other revenues represented 37% and 29% of total revenues for the three months ended September 30, 2023 and 2022, respectively. Services and other revenues include revenues from technical services and Advanced Services offerings. Services and other revenues increased by $8.4 million, primarily due to increased customer demand for our Advanced Services offerings and continued growth in our installed customer base as well as the impact of pricing actions.

Our international sales represented 9% of total revenues for both the three months ended September 30, 2023 and 2022, and are expected to be affected by foreign currency exchange rate fluctuations. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency exchange rates.

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Product revenues | $562,906 | $706,246 | $(143,340) | (20)% |
| Percentage of total revenues | 63% | 71% |  |  |
| Services and other revenues | 325,359 | 292,027 | 33,332 | 11% |
| Percentage of total revenues | 37% | 29% |  |  |
| Total revenues | $888,265 | $998,273 | $(110,008) | (11)% |

Product revenues represented 63% and 71% of total revenues for the nine months ended September 30, 2023 and 2022, respectively. Product revenues decreased by $143.3 million, primarily due to lower volumes from our automated dispensing systems business primarily as a result of ongoing health systems capital budget and labor constraints, partially offset by an increase of $6.6 million in revenues from consumables.

Services and other revenues represented 37% and 29% of total revenues for the nine months ended September 30, 2023 and 2022, respectively. Services and other revenues include revenues from technical services and Advanced Services offerings. Services and other revenues increased by $33.3 million, primarily due to increased customer demand for our Advanced Services offerings and continued growth in our installed customer base as well as the impact of pricing actions.

Our international sales represented 12% and 10% of total revenues for the nine months ended September 30, 2023 and 2022, respectively, and are expected to be affected by foreign currency exchange rate fluctuations. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency exchange rates.

Our ability to grow revenues is dependent on our ability to continue to obtain orders from customers, which may be dependent upon customers’ capital equipment budgets and/or capital equipment approval cycles, our ability to produce quality products and consumables to fulfill customer demand, the volume of installations we are able to complete, our ability to meet customer needs by providing a quality installation experience, our ability to develop new or enhance existing solutions, and our flexibility in workforce allocations among customers to complete installations on a timely basis. The timing of our product revenues for equipment is primarily dependent on when our customers’ schedules and/or staffing levels allow for installations.

### Cost of Revenues and Gross Profit

Cost of revenues is primarily comprised of three general categories: (i) standard product costs which account for the majority of the product cost of revenues that are provided to customers, and are inclusive of purchased material, labor to build the product, and overhead costs associated with production; (ii) costs of providing services and installation costs, including costs of personnel and other expenses; and (iii) other costs, including variances in standard costs and overhead, scrap costs, rework, provisions for excess and obsolete inventory, and amortization of software development costs and intangibles.

*(Dollars in thousands)*

| Cost of revenues: | Three Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of product revenues | $106,311 | $134,023 | $(27,712) | (21)% |
| As a percentage of related revenues | 56% | 54% |  |  |
| Cost of services and other revenues | 60,388 | 54,941 | 5,447 | 10% |
| As a percentage of related revenues | 55% | 54% |  |  |
| Total cost of revenues | $166,699 | $188,964 | $(22,265) | (12)% |
| As a percentage of total revenues | 56% | 54% |  |  |
| Gross profit | $131,964 | $159,095 | $(27,131) | (17)% |
| Gross margin | 44% | 46% |  |  |

33

Cost of revenues for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 decreased by $22.3 million, primarily driven by a $27.7 million decrease in cost of product revenues, partially offset by a $5.4 million increase in cost of services and other revenues.

The decrease in cost of product revenues was primarily driven by the decrease in product revenues of $57.8 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues for the three months ended September 30, 2023, primarily due to certain fixed costs, such as labor and overhead. In addition, the decrease in cost of product revenues was also driven by lower inventory-related costs as pricing for semiconductors, steel, freight, and other costs has decreased from the prior period. The increase in cost of services and other revenues was primarily driven by the increase in services and other revenues of $8.4 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022.

The overall decrease in gross margin primarily relates to lower product revenues for the three months ended September 30, 2023 compared to the three months ended September 30, 2022 whereas the decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues, primarily due to certain fixed costs, such as labor and overhead. The decrease is partially offset by lower inventory-related costs. Our gross profit for the three months ended September 30, 2023 was $132.0 million, as compared to $159.1 million for the three months ended September 30, 2022.

*(Dollars in thousands)*

| Cost of revenues: | Nine Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Cost of product revenues | $323,800 | $374,175 | $(50,375) | (13)% |
| As a percentage of related revenues | 58% | 53% |  |  |
| Cost of services and other revenues | 173,029 | 156,864 | 16,165 | 10% |
| As a percentage of related revenues | 53% | 54% |  |  |
| Total cost of revenues | $496,829 | $531,039 | $(34,210) | (6)% |
| As a percentage of total revenues | 56% | 53% |  |  |
| Gross profit | $391,436 | $467,234 | $(75,798) | (16)% |
| Gross margin | 44% | 47% |  |  |

Cost of revenues for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 decreased by $34.2 million, primarily driven by a $50.4 million decrease in cost of product revenues, partially offset by a $16.2 million increase in cost of services and other revenues.

The decrease in cost of product revenues was primarily driven by the decrease in product revenues of $143.3 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues for the nine months ended September 30, 2023, primarily due to certain fixed costs, such as labor and overhead. In addition, the decrease in cost of product revenues was also driven by lower inventory-related costs as pricing for semiconductors, steel, freight, and other costs has decreased from the prior period. The increase in cost of services and other revenues was primarily driven by the increase in services and other revenues of $33.3 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022.

The overall decrease in gross margin primarily relates to lower product revenues for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 whereas the decrease in cost of product revenues has not decreased proportionally with the decrease in product revenues, primarily due to certain fixed costs, such as labor and overhead. The decrease is partially offset by lower inventory-related costs. Our gross profit for the nine months ended September 30, 2023 was $391.4 million, as compared to $467.2 million for the nine months ended September 30, 2022.

### Operating Expenses and Interest and Other Income (Expense), Net

*(Dollars in thousands)*

| Operating expenses: | Three Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $24,281 | $25,171 | $(890) | (4)% |
| As a percentage of total revenues | 8% | 7% |  |  |
| Selling, general, and administrative | 103,971 | 115,459 | (11,488) | (10)% |
| As a percentage of total revenues | 35% | 33% |  |  |
| Total operating expenses | $128,252 | $140,630 | $(12,378) | (9)% |
| As a percentage of total revenues | 43% | 40% |  |  |
| Interest and other income (expense), net | $3,670 | $(1,148) | $4,818 | (420)% |

*Research and Development.* Research and development expenses decreased by $0.9 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease was primarily driven by cost saving initiatives, including the impact from lower consulting expenses.

*Selling, General, and Administrative*. Selling, general, and administrative expenses decreased by $11.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The decrease was primarily due to a decrease of $3.4 million in consulting expenses, a decrease of $2.7 million in commission expenses, a decrease of $2.2 million in freight out, a decrease of $1.4 million in employee-related expenses for restructuring initiatives, a decrease of $1.4 million in rent expense, and a decrease of $1.2 million of ransomware-related expenses, net of insurance recoveries, incurred during the three months ended September 30, 2022. The decrease was partially offset by $1.3 million of executives transition costs incurred during the three months ended September 30, 2023.

*Interest and Other Income (Expense), Net.* Interest and other income (expense), net changed by $4.8 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, primarily driven by a $4.5 million increase in other income and a $0.3 million decrease in other expense. The increase in other income during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 is primarily attributable to higher interest income received due to higher interest rates and higher cash and cash equivalents balances.

*(Dollars in thousands)*

| Operating expenses: | Nine Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Research and development | $70,296 | $76,556 | $(6,260) | (8)% |
| As a percentage of total revenues | 8% | 8% |  |  |
| Selling, general, and administrative | 332,643 | 354,644 | (22,001) | (6)% |
| As a percentage of total revenues | 37% | 36% |  |  |
| Total operating expenses | $402,939 | $431,200 | $(28,261) | (7)% |
| As a percentage of total revenues | 45% | 43% |  |  |
| Interest and other income (expense), net | $9,912 | $(2,973) | $12,885 | (433)% |

*Research and Development.* Research and development expenses decreased by $6.3 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease was primarily attributed to a decrease of $5.2 million in consulting expenses, a decrease in employee-related expenses for restructuring initiatives of $1.4 million, a decrease due to the timing of capitalized software projects of $1.3 million and other decreases from cost saving initiatives, partially offset by an increase of $3.8 million in employee-related expenses due to increased headcount.

*Selling, General, and Administrative*. Selling, general, and administrative expenses decreased by $22.0 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease was primarily due to a decrease of $5.8 million in commissions expenses, a decrease of $4.9 million in employee-related expenses, a decrease of $4.5 million in consulting expenses, a decrease of $3.4 million in freight out, a decrease of $3.3 million in travel expenses, and a decrease of $2.6 million in temporary labor expenses. The decrease is also driven by $2.3 million of ransomware-related expenses, net of insurance recoveries, incurred during the nine months ended September 30, 2022. The decrease is partially offset by an increase of $2.0 million in employee-related expenses for restructuring initiatives, an increase of $2.4 million for impairment and abandonment charges of operating lease right-of-use assets in connection with restructuring activities of certain leased facilities, as well as an increase of $2.2 million in executives transition costs incurred during the nine months ended September 30, 2023.

*Interest and Other Income (Expense), Net.* Interest and other income (expense), net changed by $12.9 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, primarily driven by a $12.1 million increase in other income and a $0.8 million decrease in other expense. The increase in other income during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 is primarily attributable to higher interest income received due to higher interest rates and higher cash and cash equivalents balances.

### Provision for (Benefit from) Income Taxes

*(Dollars in thousands)*

|  | Three Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Provision for income taxes | $1,829 | $543 | $1,286 | 237% |

*(Dollars in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 | Change in $% |  |
| --- | ---: | ---: | ---: | ---: |
| Provision for (benefit from) income taxes | $4,405 | $(995) | $5,400 | (543)% |

For the nine months ended September 30, 2023, we recorded a provision for income taxes of $4.4 million by applying our estimated annual effective tax rate to our year-to-date measure of ordinary income and adjusted for $5.6 million of discrete income tax expense primarily from equity compensation. For the nine months ended September 30, 2022, we recorded a benefit from income taxes of $1.0 million, and included a net discrete income tax benefit of $6.9 million, primarily due to a $5.1 million tax benefit from equity compensation. The change in the provision for income taxes for the nine months ended September 30, 2023 compared to the benefit from income taxes for the same period in 2022 was primarily due to a decrease in excess tax benefit from equity compensation, as well as the change in income (loss) before income taxes.

Refer to Note 14, *Income Taxes*, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

### LIQUIDITY AND CAPITAL RESOURCES

We had cash and cash equivalents of $446.8 million at September 30, 2023 compared to $330.4 million at December 31, 2022. All of our cash and cash equivalents are invested in bank accounts and money market funds held in sweep and asset management accounts with financial institutions of high credit quality.

Our cash position and working capital at September 30, 2023 and December 31, 2022 were as follows:

*(In thousands)*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Cash and cash equivalents | $446,840 | $330,362 |
| Working capital | $544,390 | $453,366 |

Our ratio of current assets to current liabilities was 2.5:1 and 2.1:1 at September 30, 2023 and December 31, 2022, respectively.

### Sources of Cash

#### Revolving Credit Facility

On November 15, 2019, we entered into an Amended and Restated Credit Agreement (as amended, the “Prior A&R Credit Agreement”) with the lenders from time to time party thereto, Wells Fargo Securities, LLC, Citizens Bank, N.A., and JPMorgan Chase Bank, N.A., as joint lead arrangers, and Wells Fargo Bank, National Association, as administrative agent. The Prior A&R Credit Agreement provided for (a) a five-year revolving credit facility of $500.0 million (the “Prior Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to $250.0 million (the “Prior Incremental Facility”). In addition, the Prior A&R Credit Agreement included a letter of credit sub-limit of up to $15.0 million and a swing line loan sub-limit of up to $25.0 million.

On September 22, 2020 and March 29, 2023, we entered into amendments to the Prior A&R Credit Agreement to, among other changes, permit the issuance of the convertible senior notes and the purchase of the convertible note hedge transactions, as described in Note 10, *Convertible Senior Notes*, expand our flexibility to repurchase our common stock and make other restricted payments, and replace the total net leverage covenant, as well as to remove and replace the interest rate benchmark based on the London interbank offered rate (“LIBOR”) and related LIBOR-based mechanics applicable to borrowings under the A&R Credit Agreement with an interest rate benchmark based on the secured overnight financing rate (“SOFR”) as administered by the Federal Reserve Bank of New York and related SOFR-based mechanics.

On October 10, 2023, we entered into a Second Amended and Restated Credit Agreement (the “Second A&R Credit Agreement”) with the lenders from time to time party thereto, Wells Fargo Securities, LLC, JPMorgan Chase Bank, N.A., PNC Capital Markets LLC and TD Securities (USA) LLC as joint lead arrangers and Wells Fargo Bank, National Association, as administrative agent. The Second A&R Credit Agreement supersedes the Prior A&R Credit Agreement and provides for (a) a five-year revolving credit facility of $350.0 million (the “Current Revolving Credit Facility”) and (b) an uncommitted incremental loan facility of up to an amount equal to the sum of (i) the greater of $250.0 million and 100% of the adjusted consolidated EBITDA for the last four quarters and (ii) additional amounts subject to pro forma compliance with certain consolidated secured net leverage ratio (the “Current Incremental Facility”). In addition, the Second A&R Credit Agreement includes a letter of credit sub-limit of up to $15 million and a swing line loan sub-limit of up to $25 million. The Second A&R Credit Agreement has an expiration date of October 10, 2028, subject to acceleration under certain conditions, upon which date all remaining outstanding borrowings will be due and payable.

As of September 30, 2023, we had $500.0 million of funds available and no outstanding balance under the Prior Revolving Credit Facility. As of September 30, 2023, we were in compliance with all covenants under the Prior A&R Credit Agreement. Upon entry into the Second A&R Credit Agreement, we had $350.0 million of funds available under the Current Revolving Credit Facility. Refer to Note 9, *Debt and Credit Agreement*, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information. We expect to use future loans under the Current Revolving Credit Facility, if any, for working capital, potential acquisitions, and other general corporate purposes.

### Uses of Cash

Our future uses of cash are expected to be primarily for working capital, capital expenditures, and other contractual obligations. We also expect a continued use of cash for potential acquisitions and acquisition-related activities, as well as repurchases of our common stock.

The 2016 Repurchase Program has a total of $2.7 million remaining for future repurchases as of September 30, 2023, which may result in additional use of cash. There were no stock repurchases during the nine months ended September 30, 2023. Refer to “Stock Repurchase Programs” under Note 15, *Employee Benefits and Share-Based Compensation*, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

Based on our current business plan and backlog, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations, cash generated from the exercise of employee stock options and purchases under our Employee Stock Purchase Plan (“ESPP”), along with the availability of funds under the Revolving Credit Facility will be sufficient to meet our cash needs for working capital, capital expenditures, potential acquisitions, and other contractual obligations for at least the next twelve months. For periods beyond the next twelve months, we also anticipate that our net operating cash flows plus existing balances of cash and cash equivalents will suffice to fund the continued growth of our business.

### Cash Flows

The following table summarizes, for the periods indicated, selected items in our Condensed Consolidated Statements of Cash Flows:

*(In thousands)*

| Net cash provided by (used in): | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Operating activities | $142,680 | $(4,372) |
| Investing activities | (42,644) | (41,417) |
| Financing activities | 10,290 | (24,515) |
| Effect of exchange rate changes on cash and cash equivalents | (464) | (1,425) |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | $109,862 | $(71,729) |

#### Operating Activities

We expect cash from our operating activities to fluctuate in future periods as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing of other liability payments.

Net cash provided by operating activities was $142.7 million for the nine months ended September 30, 2023, primarily consisting of a net loss of $6.0 million adjusted for non-cash items of $113.8 million and changes in assets and liabilities of $34.9 million. The non-cash items primarily consisted of depreciation and amortization expense of $65.6 million, share-based compensation expense of $43.1 million, impairment and abandonment of operating lease right-of-use assets related to facilities of $7.8 million, amortization of operating lease right-of-use assets of $6.2 million, amortization of debt issuance costs of $3.1 million, and a change in deferred income taxes of $14.2 million. Changes in assets and liabilities include cash inflows primarily from (i) a decrease in inventories of $31.7 million primarily due to management of inventory levels to align with the current forecasted demand, (ii) a decrease in accounts receivable and unbilled receivables of $27.1 million primarily due to the timing of billings, shipments, and collections, as well as the impacts of lower revenues, (iii) an increase in deferred revenues of $23.6 million primarily due to an increase in billings for certain service and subscription offerings, (iv) a decrease in prepaid commissions of $5.5 million, (v) an increase in accrued liabilities of $3.7 million, (vi) a decrease in other long-term assets of $2.5 million, and (vii) a decrease in other current assets of $1.5 million. These cash inflows were partially offset by (i) a decrease in accrued compensation of $29.4 million primarily due to a decrease in the accrual for restructuring initiatives, lower commissions, as well as timing of payroll and ESPP purchases, (ii) a decrease in accounts payable of $13.4 million primarily due to an overall decrease in spending, as well as timing of payments, (iii) an increase in investment in sales-type leases of $8.8 million primarily due to the acceptance of certain Advanced Services products under sales-type lease arrangements, and (iv) a decrease in operating lease liabilities of $8.1 million.

Net cash used in operating activities was $4.4 million for the nine months ended September 30, 2022, primarily consisting of net income of $34.1 million adjusted for non-cash items of $117.1 million, offset by changes in assets and liabilities of $155.6 million. The non-cash items primarily consisted of depreciation and amortization expense of $64.8 million, share-based compensation expense of $50.7 million, amortization of operating lease right-of-use assets of $9.7 million, impairment and abandonment of operating lease right-of-use assets of $5.4 million, amortization of debt issuance costs of $3.1 million, and a change in deferred income taxes of $17.1 million. Changes in assets and liabilities include cash outflows from (i) an increase in accounts receivable and unbilled receivables of $116.9 million primarily due to an increase in billings driven by overall business growth and the timing of shipments and collections, (ii) an increase in inventories of $32.3 million primarily to support forecasted sales, including advanced purchases of certain components, such as semiconductors, as well as higher costs of inventory and timing of shipments, (iii) a decrease in accrued compensation of $27.9 million primarily due to a decrease in accrued commissions and bonuses, as well as timing of payroll and ESPP purchases, (iv) an increase in investment in sales-type leases of $17.3 million primarily due to the increase in sales-type lease revenues associated with certain Advanced Services products, (v) a decrease in operating lease liabilities of $11.0 million, and (vi) an increase in prepaid expenses of $2.6 million. These cash outflows were partially offset by (i) an increase in deferred revenues of $17.7 million primarily due to an increase in billings driven by the timing of shipments in order to meet customers’ implementation schedules and recognition of revenues for products requiring installation, (ii) an increase in accrued liabilities of $11.7 million primarily due to an increase in taxes payable, (iii) a decrease in prepaid commissions of $8.8 million, (iv) a decrease in other current assets, net of funds held for customers, of $6.7 million primarily due to a decrease in prepaid income taxes, (v) a decrease in other long-term assets of $4.2 million, (vi) an increase in accounts payable of $2.0 million, and (vii) an increase in other long-term liabilities of $1.4 million.

#### Investing Activities

Net cash used in investing activities was $42.6 million for the nine months ended September 30, 2023, which consisted of capital expenditures of $32.4 million for property and equipment, and $10.2 million for external-use software development costs.

Net cash used in investing activities was $41.4 million for the nine months ended September 30, 2022, which consisted of $3.4 million consideration paid for the acquisition of Hub and Spoke Innovations, net of cash acquired, capital expenditures of $33.9 million for property and equipment, and $9.6 million for costs of software development for external use, partially offset by purchase price adjustments from business acquisitions of $5.5 million.

#### Financing Activities

Net cash provided by financing activities was $10.3 million for the nine months ended September 30, 2023, primarily due to $23.0 million in proceeds from employee stock option exercises and ESPP purchases, partially offset by $6.1 million in employees’ taxes paid related to restricted stock unit vesting and a net change in the customer funds balances of $6.6 million.

Net cash used in financing activities was $24.5 million for the nine months ended September 30, 2022, primarily due to $52.2 million for repurchases of our stock, and $11.4 million in employees’ taxes paid related to restricted stock unit vesting, partially offset by $39.5 million in proceeds from employee stock option exercises and ESPP purchases.

### Contractual Obligations

There have been no significant changes during the nine months ended September 30, 2023 to the contractual obligations disclosed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” set forth in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2022.

Contractual obligations as of September 30, 2023 were as follows:

*(In thousands)*

|  | Payments Due By Period Total | Remainder of 2023 | 2024 - 2025 | 2026 - 2027 | 2028 and thereafter |
| --- | ---: | ---: | ---: | ---: | ---: |
| Operating leases (1) | $49,540 | $3,340 | $21,870 | $16,276 | $8,054 |
| Purchase obligations (2) | 118,658 | 78,055 | 40,471 | 132 | — |
| Convertible senior notes (3) | 577,875 | — | 577,875 | — | — |
| Total (4) | $746,073 | $81,395 | $640,216 | $16,408 | $8,054 |

(1) Commitments under operating leases relate primarily to leased office buildings, data centers, office equipment, and vehicles. Refer to Note 12, *Lessee Leases*, of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

(2) We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. These amounts are associated with agreements that are enforceable and legally binding. The amounts under such contracts are included in the table above because we believe that cancellation of these contracts is unlikely and we expect to make future cash payments according to the contract terms or in similar amounts for similar materials.

(3) We issued convertible senior notes in September 2020 that are due in September 2025. The obligations presented above include both principal and interest for these notes. Although these notes mature in 2025, they may be converted into cash and shares of our common stock prior to maturity if certain conditions are met. Any conversion prior to maturity can result in repayment of the principal amounts sooner than the scheduled repayment as indicated in the table above. Refer to Note 10, *Convertible Senior Notes,* of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

(4) Refer to Note 13, *Commitments and Contingencies,* of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

## Market risk

As filed, 3,056 characters.

We are exposed to market risks related to fluctuations in foreign currency exchange rates and interest rates.

### Foreign Currency Exchange Risk

We operate in foreign countries which expose us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which are the British Pound and the Euro. In order to manage foreign currency risk, at times we enter into foreign exchange forward contracts to mitigate risks associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities of our foreign subsidiaries. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. We do not enter into derivative contracts for trading purposes. As of September 30, 2023, we did not have any outstanding foreign exchange forward contracts.

### Interest Rate Fluctuation Risk

We are exposed to interest rate risk through our borrowing activities. As of September 30, 2023, there was no outstanding balance under the Prior A&R Credit Agreement. Upon entry into the Second A&R Credit Agreement on October 10, 2023, we had $350.0 million of funds available under the Current Revolving Credit Facility. Refer to Note 9, *Debt and Credit Agreement,* of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

The net carrying amount under our convertible senior notes was $568.9 million as of September 30, 2023. Although our convertible senior notes are based on a fixed rate, changes in interest rates could impact the fair value of such notes. As of September 30, 2023, the fair market value of our convertible senior notes was $518.6 million. Refer to Note 4, *Cash and Cash Equivalents and Fair Value of Financial Instruments*, and Note 10, *Convertible Senior Notes,* of the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for additional information.

We have used, and in the future we may use, interest rate swap agreements to protect against adverse fluctuations in interest rates by reducing our exposure to variability in cash flows relating to interest payments on a portion of our outstanding debt. We do not hold or issue any derivative financial instruments for speculative trading purposes. As of September 30, 2023, we did not have any outstanding interest rate swap agreements.

There were no significant changes in our market risk exposures during the nine months ended September 30, 2023 as compared to the market risk exposures disclosed in “Quantitative and Qualitative Disclosures About Market Risk,” set forth in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 1, 2023.

## Controls and procedures

As filed, 2,140 characters.

### Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. These disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in this Quarterly Report on Form 10-Q was (i) recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and regulations and (ii) accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.

Based on such evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this report.

### Limitations on Effectiveness of Controls

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of financial statements for external purposes in accordance with GAAP. All internal control systems, no matter how well designed, have inherent limitations and can provide only reasonable assurance that the objectives of the internal control system are met.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting during the three months ended September 30, 2023.

## Risk factors

As filed, 6,769 characters.

Other than the updates provided below, please refer to Part I - Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022, which was filed with the U.S. Securities and Exchange Commission on March 1, 2023.

***We have incurred substantial debt, which could impair our flexibility and access to capital and adversely affect our financial position.***

On November 15, 2019, we refinanced our existing senior secured credit facility pursuant to an amended and restated agreement with certain lenders, and Wells Fargo Bank, National Association, as administrative agent (as amended, the “Prior A&R Credit Agreement”). The Prior A&R Credit Agreement provided for a five-year revolving credit facility of $500.0 million and an uncommitted incremental loan facility of up to $250.0 million. As of December 31, 2022, there were no outstanding balances under the Prior A&R Credit Agreement.

Subsequently, on October 10, 2023, we refinanced the Prior A&R Credit Agreement pursuant to a second amended and restated agreement with certain lenders, and Wells Fargo Bank, National Association, as administrative agent (the “Second A&R Credit Agreement”). The Second A&R Credit Agreement provides for a five-year revolving credit facility of $350.0 million and an uncommitted incremental loan facility of up to an amount equal to the sum of (x) the greater of $250.0 million and 100% of the adjusted consolidated EBITDA for the last four quarters and (y) additional amounts subject to pro forma compliance with certain consolidated secured net leverage ratio.

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, as trustee. We used a portion of the proceeds from the issuance of the Notes to repay all outstanding borrowings under the revolving credit facility at the time.

Our debt 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 or may require us to use a substantial portion of our cash flow for debt service payments; 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 make payments of the principal, to pay interest, or to refinance our indebtedness, including the Notes, depends on our future performance, which is subject to economic, financial, competitive, and other factors beyond our control. Our business may not continue to, and we cannot provide assurance that our business will, generate cash flow from operations in the future sufficient to fund our cash requirements, service our debt 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 adopt one or more alternatives, such as borrowing more money, selling assets, restructuring debt, or obtaining additional equity capital on terms that may be onerous or highly dilutive. Any of these actions still may not be sufficient to allow us to service our debt obligations, could increase the risks related to our business or our ability to service or repay our indebtedness 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 the time of any such refinancing. We may not be able to engage in any of these activities or to do so on desirable terms, which could result in a default on our debt obligations. In addition, as more fully described below in the risk factor captioned “Covenants in our Second 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 business, operating results, cash flow, or financial condition could be adversely affected,” the Second A&R Credit Agreement includes customary restrictive covenants that impose operating and financial restrictions on us.

***Covenants in our Second 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 operating results could be adversely affected.***

The Second A&R Credit Agreement contains various customary covenants that require us 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, incur or assume liens or additional debt or provide guarantees in respect of obligations of 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, 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 Second A&R Credit Agreement also includes financial covenants requiring us (i) not to exceed a maximum consolidated secured net leverage ratio of 3.00:1 and (ii) to maintain a minimum consolidated interest coverage ratio of 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 Second A&R Credit Agreement could result in a default under the terms of the Second 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 agent and the lenders under the Second 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.

Filed Nov 3, 2023.
Source: SEC EDGAR, the filing index for accession 0000926326-23-000041. Last ingested by Listed: Nov 4, 2026, 17:07 ET. No prices; not investment advice.