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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-02-25 · 156 added, 161 removed, 314 unchanged (50% of the section changed)

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The following discussion and analysis should be read in conjunction with our Consolidated Financial Statements and related Notes in this Annual Report on Form 10-K.

This may contain forward-looking statements based upon current expectations that involve risks and uncertainties.

This discussion and analysis may contain forward-looking statements based upon our current expectations and assumptions that involve risks and uncertainties.

Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of several factors, including those set forth under Item 1A, “Risk Factors,” and elsewhere in this Annual Report on Form 10-K.

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Such omitted discussion can be found under Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, located in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC on February 25, 2022, for reference to discussion of the fiscal year ended December 31, 2020, the earliest of the three fiscal years presented.

Omnicell, a leader in transforming the pharmacy care delivery model, is committed to elevating the role of pharmacy within healthcare and transforming medication management as an essential component of the pharmacy care delivery model.

We are doing so with an industry-leading comprehensive intelligent infrastructure, bringing together technology, analytics, and expert services to equip and empower pharmacists and pharmacies to focus on clinical care rather than administrative tasks.

We believe this intelligent infrastructure provides the critical foundation for realizing the industry vision of the Autonomous Pharmacy, a vision defined by pharmacy leaders for improving operational efficiencies and ultimately targeting zero-error medication management.

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, the United Kingdom, Germany, and Australia leverage our innovative medication adherence and population health solutions to improve patient engagement and adherence to prescriptions, helping to reduce costly hospital readmissions.

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.

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This expansion has resulted in larger deal sizes across multiple products, services, and implementations for customers and, we believe, more comprehensive, valuable, and enduring relationships.

We utilize product bookings as an indicator of the success of our business.

Product bookings generally consist of all firm orders other than for technical services and other less significant items, as evidenced generally by a non-cancelable contract and purchase order for equipment, software products, and Advanced Services, and by a purchase order for consumables.

A majority of our connected devices and software license product bookings are installable within twelve months of booking, and are recorded as revenue upon customer acceptance of the installation or receipt of goods.

Revenues from software-as-a-service (“SaaS”), subscription software, and technology-enabled services product bookings are recorded over the contractual term.

Product bookings increased by 21%, from $1.002 billion in 2020 to $1.217 billion in 2021, driven by the success of our growth strategies in our comprehensive platform and differentiated products, as well as expanding our customer portfolio.

In addition to product solution sales, we provide services to our customers.

We provide installation planning and consulting as part of most product sales which is generally included in the initial price of the solution.

We also provide Advanced Services such as Omnicell One, EnlivenHealth, 340B solutions, Central Pharmacy Dispensing Services, and Central Pharmacy Compounding Services.

To help assure the maximum availability of our systems, our customers typically purchase maintenance and support contracts in increments of one to five years.

As a result of the growth of our installed base of customers and expanded service offerings, our service revenues have also grown.

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 f or 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.

Bookings decreased by 13%, from $1.217 billion in 2021 to $1.054 billion in 2022, primarily driven by reduced demand for connected devices, partially offset by strong demand for Advanced Services offerings and the impact of acquisitions.

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 (1)

Income Statement Classification

Included in Product Bookings

Included in Bookings

Connected devices, software licenses, and other

High visibility/

Technical services

High visibility/

SaaS, subscription software, and technology-enabled services

High visibility/

Advanced Services (2) (3)

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(1) All revenue types are highly visible from long-term, sole-source agreements, backlog, or the recurring nature of the revenue stream.

(2) Freight revenue and certain other insignificant revenue streams are not included in product bookings.

Our full-time employee headcount of approximately 3,800 on December 31, 2021, an increase of approximately 940 employees since December 31, 2020, reflects our efforts to grow Omnicell’s operations, including through the impact of incremental headcount in connection with recent acquisitions, while continuing to drive profitability and optimizing resource allocation.

(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 4,230 on December 31, 2022, an increase of approximately 430 employees since December 31, 2021.

In November 2022, we announced a restructuring plan intended to reduce our global workforce across a majority of our functions affecting approximately 350 employees.

The majority of employees impacted by this restructuring event were included in our headcount as of December 31, 2022 with termination dates in early 2023.

Operating Segments

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Business Strategy

We are committed to being the care providers’ and retail pharmacies’ most trusted partner and executing on the industry vision of the Autonomous Pharmacy by developing and delivering an intelligent medication management infrastructure composed of devices, digital workflows, analytics, and experts, all powered by the cloud.

We believe there are significant challenges facing the pharmacy practice today including, but not limited to, labor shortages, medication errors, drug shortages, medication loss due to drug diversion, significant medication waste and expiration costs, a high level of manual steps in the medication management process, complexity around compliance requirements, high pharmacy employee turnover rates affecting tenure and expertise, hospitalizations from adverse drug events in outpatient settings, high variability in outcomes, and limited inventory visibility.

We believe that these significant challenges to the pharmacy practice drive the demand for increased digitization, visibility, and insights that our solutions enable, and represent large opportunities in four market categories:

spent a total of $577 billion on prescription drugs that accounted for 14% of National Health Expenditures in 2021, and prescription drugs impact the vast majority of patients in virtually all settings of care.

We believe there are significant challenges facing the practice of pharmacy today including, but not limited to, 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 believe that these significant challenges to the practice of pharmacy drive demand for increased digitization, visibility, and insights that our solutions enable, and that our solutions therefore present large opportunities.

In an effort to address these challenges and deliver solutions to help drive positive medication management outcomes, 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 drive these 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 of this product category as customers increase use of our dispensing systems in more areas within their hospitals.

We are more than halfway through the replacement, upgrade, and expansion cycle of older models of automated dispensing systems with our XT Series automated dispensing systems within our own customer base, which we believe is a significant market opportunity.

We have been successful penetrating markets through competitive conversions and expect this success to continue.

We also believe there is an opportunity for us to define a new standard of care for dispensing systems in perioperative settings.

We believe our current portfolio within the Point of Care market and new innovation and services will continue to drive improved outcomes and lower costs for our customers.

• Central Pharmacy.

This market represents the beginning of the medication management process in acute care settings, and, we believe, the next big automation opportunity to replace high volumes of manual and repetitive processes that are common in pharmacies today.

Manual processes are prone to significant errors, and products such as IVX Workflow, our IV Sterile Compounding Service (including IV robotics), and our Central Pharmacy Dispensing Service (including the XR2 Automated Central Pharmacy System), automate these manual processes and are designed to reduce the risk of error for our healthcare partners.

Because automation adoption in the Central Pharmacy is still nascent, we believe that the adoption of solutions will be accelerated by bundling those solutions with technology-enabled services that are designed to deliver specific outcomes and leverage intelligence across the enterprise for more actionable insights, and are expected to reduce administrative burden, allowing clinicians to operate at the top of their license.

We think that these bundled solutions are becoming more

critical than ever as health systems appear to face increasing labor shortages and supply chain disruption following the COVID-19 pandemic.

Additionally, we believe new products, innovations and our expertise in the Central Pharmacy market create opportunities to replace prior generation Central Pharmacy robotics, especially when combining those robotics with carousels and technology-enabled services to increase the percentage of medication managed through the intelligent infrastructure.

As a market leader, we expect to continue expansion into this product market as customers increase use of our dispensing systems in more areas within their hospitals.

Should labor shortages continue to challenge the delivery of healthcare services, we believe that deploying solutions and workflows that are intended to save nursing time is essential.

We are more than halfway through the replacement, upgrade, and expansion cycle of older models of automated dispensing systems with our XT Series within our customer base, which we believe remains a significant market opportunity.

We have been successful in market expansion through competitive conversions and we expect this success to continue.

We also believe there is an opportunity for us to expand the 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.

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 improve patient outcomes, and pharmacy will be at the center with specialty pharmacies and the 340B Drug Pricing Program.

Studies have shown that specialty medications represent over 50% of the country’s total spending on retail, mail-order, and provider-administered drugs.

Used for treatment of complex conditions, these medications often require intensive patient management and specialized workflows for dispensing and care coordination.

Specialty pharmacies serve as the connection between patients, prescribing physicians, and payors to ensure streamlined access and adherence to these specialty drugs, helping to maintain continuity of care throughout the process, and are expected to improve margin and profitability for the health system.

The newly acquired ReCept Holdings, Inc.

(“ReCept”) solution provides implementation and managed services for health systems and other provider organizations to optimize their specialty pharmacy programs and the related pharmaceutical aspects of patient care.

The 340B market is targeted to covered entities participating in Section 340B of the Public Health Services Act.

The Public Health Services Act requires pharmaceutical manufacturers participating in Medicaid to sell outpatient drugs at discounted prices to healthcare organizations that care for many uninsured and low-income patients and creates a complex compliance environment.

According to the Health Resources and Services Administration, which is responsible for administering the 340B program, enrolled hospitals and other covered entities can achieve an average savings of 25% to 50% in pharmaceutical purchases.

Due to the complexities of adhering to the administrative process of the 340B program, we believe that there are significant opportunities for health systems to improve participation benefits and maximize program savings through our 340B technology-enabled services.

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 60% of U.S.

total spending on medications, with total spending projected to be approximately $420 billion in 2025.

Specialty pharm acies 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.

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A majority of all prescription drugs are distributed in the non-acute sector.

The COVID-19 pandemic accelerated the shift of primary healthcare settings from hospitals and doctors’ offices to other convenient channels like the home, digital, and retail pharmacies.

New technology and updated state board regulations are leading to innovation at traditional retail providers, which, combined with the move to value-based care, we believe will incentivize the market to adopt solutions to help providers and payers engage patients in new ways that improve patient care and reduce the total cost of care.

We believe adoption of our EnlivenHealth portfolio of software products and services, along with medication adherence packaging, will increase adherence performance rates, increase prescription volume for our customers, and reduce hospital and emergency room visits due to improved adherence.

Our EnlivenHealth portfolio has been expanded with two recent acquisitions that will assist in adoption and drive innovation.

RxInnovation Inc., operating as FDS Amplicare (“FDS Amplicare”), is a leading provider of financial management, analytics, and population health solutions to the retail pharmacy industry, including independent pharmacies.

MarkeTouch Media, LLC (“MarkeTouch Media”) has longstanding pharmacy chain relationships that further broaden EnlivenHealth’s national pharmacy network.

We believe our technology, services, and solutions within these market categories position us well to address the needs of acute, post-acute, ambulatory, and retail pharmacy providers and health plans.

The COVID-19 pandemic accelerated the shift of certain primary 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.

COVID-19 Update

We continue to closely monitor the COVID-19 pandemic and ongoing impacts on the Company.

During the first half of 2020, as a result of the COVID-19 pandemic, health systems faced financial and operational pressures which we believe led our customers to delay or defer purchasing decisions and/or implementation of our solutions.

Beginning in the third quarter of 2020, we began to see our customers returning to pre-pandemic purchasing patterns consistent with long-term strategic investments and this trend continued through 2021.

We believe that the challenges that our customers have faced during the COVID-19 pandemic, including the need for robust visibility throughout their pharmacy supply chains, have increased the strategic relevance of our products and services.

Although COVID-19 vaccines are now available and being widely distributed, there remains significant uncertainty regarding the duration and severity of the continuing impact of the pandemic on the U.S.

and world economies, including the impact of new variants of the COVID-19 virus.

The ongoing impact of the COVID-19 pandemic on our business remains uncertain, and the duration and scope of such impact cannot currently be predicted.

We continue to carefully monitor this

dynamic situation and may adjust our outlook as appropriate.

The ongoing impact of the COVID-19 pandemic may result in increased borrowing costs and other costs of capital or otherwise adversely affect our business, results of operations, financial condition, and liquidity.

We continue to monitor the COVID-19 pandemic and ongoing impacts on the Company.

At the outset of the COVID-19 pandemic, many health systems faced financial and operational pressures which we believe led our customers to delay or defer purchasing decisions and/or implementation of our solutions.

However, it currently appears that the COVID-19 pandemic is no longer directly impacting our customers’ buying patterns.

We believe that the challenges our customers have faced during the COVID-19 pandemic, including the need for robust visibility throughout their pharmacy supply chains, have increased the strategic relevance of our products and services.

The COVID-19 pandemic continues to evolve and there remains uncertainty regarding the continuing impact of the pandemic, including the impact of new variants of the COVID-19 virus, on the U.S.

and world economies, as well as on our business.

We continue to monitor this dynamic situation and may adjust our outlook as appropriate.

The ongoing impact of the COVID-19 pandemic, and the resulting increased economic and demand uncertainty, may adversely affect our business, operating results, cash flow, financial condition, and liquidity (including increased borrowing costs or other costs of capital).

However, under current circumstances, we believe that our financial position and resources will allow us to manage the anticipated impact of the COVID-19 pandemic on our business for the foreseeable future.

Ransomware Incident

On May 4, 2022, we determined that certain of our information technology systems were affected by ransomware impacting certain internal systems.

Upon detecting the security event, we took immediate steps designed to contain the incident and implement our business continuity plans to restore and support continued operations.

We have contained the incident and restored substantially all of our critical information technology systems.

As a result of the ransomware incident, (i) invoicing

was delayed, which impacted the timing of cash collections and free cash flow within the year, and (ii) we experienced customer implementation delays during the year as we recovered from the impacts of the ransomware incident.

Substantially all delayed implementations due to the ransomware incident have been completed as of the end of the year.

Furthermore, any delayed or impacted processes have returned to normal operations.

We do not believe the security event will have a material adverse effect on our business, operating results, cash flow, or financial condition.

On January 10, 2022, we completed the acquisition of Hub and Spoke Innovations Limited (“Hub and Spoke Innovations”), pursuant to the terms and conditions of the Share Purchase Agreement, dated January 10, 2022, by and among Omnicell Limited (a wholly-owned subsidiary of the Company), Hub and Spoke Innovations Limited, and certain beneficial stockholders specified therein for a base purchase price of £2.5 million (approximately $3.4 million based on the exchange rate in effect at the acquisition date), prior to customary adjustments for closing cash, net working capital, and assumed indebtedness.

The Hub and Spoke Innovations acquisition is expected to complement Omnicell’s total solution technology portfolio for retail pharmacy in the United Kingdom to help pharmacies improve workflows, offer patients 24/7 access to their medications and provide enhanced patient care.

The results of the operations of Hub and Spoke Innovations have been included in our consolidated results of operations beginning January 10, 2022.

On December 31, 2021, we completed the acquisition of MarkeTouch Media pursuant to the terms and conditions of the Unit Purchase Agreement, dated December 31, 2021, by and among ateb, Inc.

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The results of the operations of MarkeTouch Media have been included in our consolidated results of operations beginning December 31, 2021.

On December 29, 2021, we completed the acquisition of ReCept pursuant to the terms and conditions of the Agreement and Plan of Merger, dated December 1, 2021, by and among Omnicell, Inc., ReCept Holdings, Inc., Redfish Acquisition Corp, and the representative of the securityholders for a base purchase price of $100.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness.

The addition of ReCept’s specialty pharmacy management services for health systems, provider groups, and federally qualified health centers expands Omnicell’s Advanced Services portfolio in an effort to address the growing and complex specialty pharmacy market.

On December 29, 2021, we completed the acquisition of ReCept Holdings, Inc., (“ReCept”), which was subsequently renamed Omnicell Specialty Pharmacy Services, Inc., pursuant to the terms and conditions of the Agreement and Plan of Merger, dated December 1, 2021, by and among Omnicell, Inc., ReCept Holdings, Inc., Redfish Acquisition Corp, and the representative of the securityholders for a base purchase price of $100.0 million, prior to customary adjustments for closing cash, net working capital, and assumed indebtedness.

The addition of ReCept’s specialty pharmacy management services, now a part of the Company’s Specialty Pharmacy Services, for health systems, provider groups, and federally qualified health centers expands Omnicell’s Advanced Services portfolio in an effort to address the growing and complex specialty pharmacy market.

The results of the operations of ReCept have been included in our consolidated results of operations beginning December 29, 2021.

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The results of the operations of FDS Amplicare have been included in our consolidated results of operations beginning September 9, 2021.

On October 1, 2020, we completed the acquisition of the 340B Link business (the “340B Link Business”) of Pharmaceutical Strategies Group, LLC pursuant to the terms and conditions of the Equity Purchase Agreement, dated August 11, 2020, as amended, by and among the Company, PSGH, LLC, BW Apothecary Holdings, LLC, the sellers identified therein and the sellers’ representative for total cash consideration of $225.0 million.

The acquisition adds a comprehensive and differentiated suite of software-enabled services and solutions used by certain eligible hospitals, health systems, clinics, and entities to manage compliance and capture 340B drug cost savings on outpatient prescriptions filled through the eligible entity’s pharmacy or a contracted pharmacy partner.

The results of the operations of the 340B Link Business have been included in our consolidated results of operations beginning October 1, 2020.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer .

We perform a credit check for all significant customers or transactions and where collectability is not probable, payment in full or a substantial down payment prior to shipment is typically required to help assure the full agreed upon contract price will be collected.

We perform a credit check for all significant customers or transactions and where collectability is not probable, payment in full or a substantial down payment prior to shipment is typically required to help ensure the full agreed upon contract price will be collected.

Distinct goods or services are identified as performance obligations.

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Where a good or service is determined not to be distinct, we combine the good or service with other promised goods or services until a bundle of goods or services that is distinct is identified.

To identify our performance obligations, we consider all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

To identify our performance obligations, we consider all products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices.

When performance obligations are included in separate contracts, we consider an entire customer arrangement to determine if separate contracts should be considered combined for the purposes of revenue recognition.

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For all other products, control generally passes when product has been shipped and title has passed.

For maintenance contracts and certain other services, including SaaS, subscription software, and technology-enabled services, provided on a subscription basis, control passes to the customer over time, generally ratably over the service term as we provide a stand-ready service for the customer’s equipment.

For maintenance contracts and certain other services, including Advanced Services provided on a subscription basis, control passes to the customer over time, generally ratably over the service term as we provide a stand-ready service for the customer’s equipment.

Time and material services transfer control to the customer at the time the services are provided.

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Changes to any contract are accounted for as a modification of the existing contract to the extent the goods and services to be delivered as part of the contract are generally consistent with the nature and type of those to be provided under the terms of the original contract.

Examples of such change orders include the addition or removal of units of equipment

or changes to the configuration of the equipment where the overall nature of the contract remains intact.

Examples of such change orders include the addition or removal of units of equipment or changes to the configuration of the equipment where the overall nature of the contract remains intact.

Our change orders generally result in the change being accounted for as modifications of existing contracts given the nature of the impacted orders.

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We optimize cash flows by selling a majority of our non-U.S.

government sales-type leases to third-party leasing finance companies on a non-recourse basis.

government sales-type leases, other than Advanced Services sales-type leases, to third-party leasing finance companies on a non-recourse basis.

We have no obligation to the leasing company once the lease has been sold.

Some of our sales-type leases, mostly those relating to U.S.

government hospitals, are retained in-house.

government hospitals, and those associated with financed service contracts related to certain Advanced Services products, including Central Pharmacy Dispensing Service and IV Compounding Service, are retained in-house.

Allowance for Credit Losses

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Actual demand may differ from forecasted demand and may have a material effect on gross margins.

If inventory is written down, a new cost basis is established that

cannot be increased in future periods.

If inventory is written down, a new cost basis is established that cannot be increased in future periods.

Shipments from suppliers or contract manufacturers before we receive them are recorded as in-transit inventory when title and the significant risks and rewards of ownership have passed to us.

Software Development Costs

We capitalize certain software development costs in accordance with Accounting Standards Codification (“ASC”) 985-20, Costs of Software to Be Sold, Leased, or Marketed , under which those costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products.

Software Development Costs for Internal Use

We capitalize costs related to computer software developed or obtained for internal use in accordance with Accounting Standards Codification (“ASC”) 350-40, Internal-Use Software .

Software developed or obtained for internal use includes certain costs for the development of our subscription and cloud-based offerings sold to customers, as well as enterprise-level business and finance software customized to meet specific operational needs.

Costs incurred in the application development phase are capitalized and amortized over their useful lives, which is generally five years.

Costs recognized in the preliminary project phase and the post-implementation phase are expensed as incurred.

Software Development Costs for External Use

We capitalize certain software development costs in accordance with ASC 985-20, Costs of Software to Be Sold, Leased, or Marketed , under which those costs incurred subsequent to the establishment of technological feasibility may be capitalized and amortized over the estimated lives of the related products.

We establish technological feasibility when we complete a detail program design or a working model.

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When we have made a decision to exercise an early termination option, the right-of-use assets and associated lease liabilities are remeasured in accordance with the present value of the remaining cash flows under the lease contract.

Certain building lease agreements include rental payments subject to change annually based on fluctuations in various indexes ( i.e.

Consumer Price Index (“CPI”), Retail Price Index, and other international indexes).

Certain building lease agreements include rental payments subject to change annually based on fluctuations in various indexes (i.e ., Consumer Price Index (“CPI”), Retail Price Index, and other international indexes).

Certain data center lease agreements include rental payments subject to change based on usage and CPI fluctuations.

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The purchase price is equivalent to the fair value of consideration transferred.

Tangible and identifiable intangible assets acquired and liabilities assumed as of the acquisition date are recorded at the acquisition date fair value.

Tangible and identifiable intangible assets acquired and liabilities

assumed as of the acquisition date are recorded at the acquisition date fair value.

Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed.

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Goodwill and Acquired Intangible Assets

We review goodwill for impairment on an annual basis on the first day of the fourth quarter of each year at the reporting unit level.

We assess goodwill for impairment on an annual basis on the first day of the fourth quarter of each year at the reporting unit level.

This assessment is also performed whenever there is a change in circumstances that indicates the carrying value of goodwill may be impaired.

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(i) past, current, and projected future earnings and equity;

(ii) recent trends and

market conditions;

(ii) recent trends and market conditions;

and (iii) valuation metrics involving similar companies that are publicly-traded and acquisitions of similar companies, if available.

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The impairment charge will be limited to the amount of goodwill.

To determine the reporting unit’s fair value under the quantitative approach, we use a combination of income and market approaches, equally weighting the two approaches, such as estimated discounted future cash flows of the reporting unit, multiples of earnings or revenues, and analysis of recent sales or offerings of comparable entities.

To determine the reporting unit’s fair value under the quantitative approach, we use a combination of income and market approaches, such as estimated discounted future cash flows of the reporting unit, multiples of earnings or revenues, and analysis of recent sales or offerings of comparable entities.

We also consider our market capitalization on the date of the analysis to ensure the reasonableness of our reporting unit’s fair value.

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Such change could result in impairment charges in future periods, which could have a significant impact on our operating results and financial condition.

Convertible Debt

We account for convertible debt and related transactions in accordance with ASC 470-20, Debt with Conversion and Other Options, ASC 815, Derivatives and Hedging, and ASC 480, Distinguishing Liabilities from Equity .

We evaluate convertible debt instruments and related transactions at inception to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for.

Convertible debt instruments that may be settled in cash are separated into liability and equity components.

The allocation to the liability component is based on the fair value of a similar instrument that does not contain an equity conversion option.

Based on this debt-to-equity ratio, debt issuance costs are then allocated to the liability and equity components in a similar manner.

The difference between the principal amount of the convertible debt instruments and the liability component, inclusive of issuance costs, represents the debt discount, which is amortized to interest expense over the term of instruments.

The determination of the discount rate requires certain estimates and assumptions.

Convertible note hedge and warrant transactions associated with convertible debt instruments are accounted for as equity instruments, and are recorded in additional paid-in capital in the Consolidated Balance Sheets.

Valuation of Share-Based Compensation

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Expense is recognized on a straight-line basis over the requisite service period.

The fair value of restricted stock units (“RSUs”) is based on the stock price on the grant date.

The fair value of restricted stock awards (“RSAs”) is their intrinsic value, which is the difference between the fair value of the underlying stock

at the measurement date and the purchase price.

The fair value of restricted stock units (“RSUs”) and restricted stock awards (“RSAs”) is based on the stock price on the grant date.

The RSUs and RSAs are subject to a service vesting condition and are recognized on a straight-line basis over the requisite service period.

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Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the periods in which those tax assets and liabilities are expected to be realized or settled.

In the event that these tax rates change, we will incur a benefit or detriment on our income tax expense in the period of change.

In the event that these tax rates change, we will incur a benefit or detriment on our income tax expense in the period of enactment.

If we were to determine that all or part of the net deferred tax assets are not realizable in the future, we will record a valuation allowance that would be charged to earnings in the period such determination is made.

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Recently Issued Authoritative Guidance

Refer to Note 1, Organization and Summary of Significant Accounting Policies , of the Notes to Consolidated Financial Statements in this Annual Report on Form 10-K for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position, and cash flows.

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

RESULTS OF OPERATIONS

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Product revenues represented 70% and 72% of total revenues for the years ended December 31, 2022 and 2021, respectively.

Product revenues increased by $176.5 million, due to increased customer demand, primarily within our automated dispensing systems business.

In comparison, results for the year ended December 31, 2020 were impacted by the COVID-19 pandemic as health systems were focusing resources on COVID-19 essential activities.

Product revenues increased by $90.7 million, due to increased customer demand, primarily within our automated dispensing systems business, as well as increased revenues from our IV Compounding Service and Central Pharmacy Dispensing Service.

Services and other revenues represented 30% and 28% of total revenues for the years ended December 31, 2022 and 2021, respectively.

Services and other revenues include revenues from technical services;

SaaS, subscription software, and technology-enabled services;

and other services.

Services and other revenues increased by $63.3 million, primarily due to incremental revenues of $48.8 million from the recent acquisitions of the 340B Link Business and FDS Amplicare, as well as continued growth in our installed customer base and our expanded portfolio of services and solutions.

Our international sales represented 10% and 11% of total revenues for the years ended December 31, 2021 and 2020, respectively, and are expected to be affected by foreign currency exchange rate fluctuations.

Services and other revenues include revenues from technical services and Advanced Services offerings.

Services and other revenues increased by $73.2 million, primarily due to growth in our Advanced Services, including

incremental Advanced Services revenues from our recent acquisitions of FDS Amplicare, ReCept, and MarkeTouch Media.

The increase was partially offset by a decrease in revenues from 340B solutions primarily due to impacts from decreasing provider utilization of the 340B program as a result of recent drug manufacturer actions.

Our international sales represented 10% of total revenues for both of the years ended December 31, 2022 and 2021, and are expected to be affected by foreign currency exchange rate fluctuations.

We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency exchange rates.

Our ability to continue to grow revenues is dependent on our ability to continue to obtain orders from customers, 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 allow for installations.

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

The timing of our product revenues for equipment is primarily dependent on when our customers’ schedules and/or staffing levels allow for installations.

Cost of Revenues and Gross Profit

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Cost of revenues for the year ended December 31, 2022 compared to the year ended December 31, 2021 increased by $129.6 million, of which $70.8 million was attributed to the increase in cost of product revenues and $58.8 million was attributed to the increase in cost of services and other revenues.

The increase in cost of product revenues was primarily driven by the increase in product revenues of $176.5 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, as well as increased inventory-related costs due to inflationary impacts during the second half of 2021.

The increase was partially offset by the benefits associated with economies of scale due to higher volumes during the year ended December 31, 2021 compared to the year ended December 31, 2020, as well as a reduction of employee-related expenses for restructuring initiatives.

The increase in cost of services and other revenues was primarily driven by the increase in services and other revenues of $63.3 million, including incremental revenues from the recent acquisitions of the 340B Link Business and FDS Amplicare, for the year ended December 31, 2021 compared to the year ended December 31, 2020, as well as additional investments in our service business to support new service solutions.

The overall increase in gross margin primarily relates to higher revenues for the year ended December 31, 2021 due to increased customer demand, benefits associated with economies of scale due to higher volumes, as well as the reduction of employee-related expenses for restructuring initiatives.

Gross margins during the year ended December 31, 2020 were impacted by the COVID-19 pandemic.

The increase in cost of product revenues was primarily driven by the increase in product revenues of $90.7 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was also driven by inventory-related costs due to inflationary impacts, higher employee-related and travel expenses due to increased headcount, as well as an increase in employee-related expenses for restructuring initiatives.

This increase was partially offset by the benefits associated with economies of scale due to higher volumes during the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase in cost of services and other revenues was primarily driven by the increase in services and other revenues of $73.2 million, including incremental revenues from our recent acquisitions, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The cost of service and other revenues grew at a faster pace than our service and other revenues primarily due to additional investments in our service business to support new service solutions, the impact of lower 340B solutions revenues, and the mix of service revenues recognized during the year ended December 31, 2022.

The overall decrease in gross margin primarily relates to additional investments in our business, including our service solutions, the impact of lower 340B solutions revenues, and the mix of service revenues recognized in the quarter, as well as inflationary impacts on inventory-related costs and higher employee-related and travel expenses.

The decrease is partially offset

by higher revenues for the year ended December 31, 2022 due to increased customer demand as well as benefits associated with economies of scale due to higher volumes.

Our gross profit for the year ended December 31, 2022 was $589.0 million, as compared to $554.7 million for the year ended December 31, 2021.

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Research and development expenses increased by $29.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily attributed to an increase in employee-related expenses of approximately $12.6 million due to increased headcount to support the continued development of our intelligent infrastructure, as well as due to incremental headcount from recent acquisitions.

This increase is partially offset by a reduction of $3.6 million in employee-related expenses for restructuring initiatives, as well as various decreases due to the timing of projects.

The increase was primarily attributed to an increase in employee-related expenses of approximately $19.6 million due to increased headcount to support the continued development of our intelligent infrastructure and incremental headcount from recent acquisitions, as well as an increase of $3.5 million in employee-related expenses for restructuring initiatives.

Selling, General, and Administrative .

Selling, general, and administrative expenses increased by $96.9 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase was primarily due to an increase of approximately $50.4 million in employee-related expenses primarily related to increased headcount, including the incremental headcount from recent acquisitions, as well as an increase in acquisition-related expenses of $5.1 million, and an increase in intangible asset amortization expense of $4.3 million.

The increase was also driven by an increase in shipping and handling costs, as well as higher spending related to travel, recruiting, temporary labor, consulting, maintenance contract expenses, and other operating expenses, most of which were significantly curtailed in 2020 due to the COVID-19 pandemic.

The increase was partially offset by a reduction in employee-related expenses for restructuring initiatives of $2.2 million.

The increase was primarily due to an increase of approximately $42.4 million in em ployee-related expenses primarily related to increased headcount, including the incremental headcount from recent acquisitions, as well as an increase o f $9.6 million in employee-related expenses for restructuring initiatives.

The increase was also driven by an increase in spending on travel and meetings of $7.6 million, an increase in intangible asset amortization expense of $7.0 million, an i ncrease in shipping and handling costs of $6.4 million, an increase in consulting expens es of $3.5 million, an in crease in spendi ng on software of $4.1 million, an increase in trade show expenses of $4.0 million, and increases in other operating expenses.

In addition, we incurred impairment and abandonment charges to operating lease right-of-use assets of $9.4 million and ransomware-related expenses, net of insurance recoveries, of $2.0 million during the year ended December 31, 2022.

The increase was partially offset by a decrease of $10.6 million in acquisition related expenses.

Interest and Other Income (Expense), Net.

Interest and other income (expense), net, changed by $17.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, primarily driven by a $16.7 million increase in other expenses.

The increase in other expenses during the year ended December 31, 2021 compared to the year ended December 31, 2020 is primarily driven by amortization of discount and debt issuance costs as well as interest expense associated with our convertible senior notes issued in September 2020.

Provision for (Benefit from) Income Taxes

Interest and other income (expense), net, changed by $23.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily driven by a $18.1 million decrease in other expenses and a $5.3 million increase in other income.

The decrease in other expenses during the year ended December 31, 2022 compared to the year ended December 31, 2021 is primarily due to the adoption of Accounting Standards Update (“ASU”) 2020-06, effective January 1, 2022, which eliminated the imputed interest expense recognized on our convertible senior notes (refer to Note 1, Organization and Summary of Significant Accounting Policies of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information).

The increase in other income during the year ended December 31, 2022 compared to the year ended December 31, 2021 is primarily attributable to benefits from certain arrangements outside of our normal course of business, as well as higher interest income received due to higher interest rates.

Benefit from Income Taxes

Year Ended December 31, Change in

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(Dollars in thousands)

Provision for (benefit from) income taxes $ (11,842) $ (2,845) $ (8,997) 316%

Benefit from income taxes $ (8,101) $ (11,842) $ 3,741 (32)%

Effective tax rate on earnings 330% (18)%

We recorded an income tax benefit of $11.8 million and had a negative effective tax rate of 18% for the year ended December 31, 2021 compared to an income tax benefit of $2.8 million and a negative effective tax rate of 10% for the year ended December 31, 2020.

The 2021 annual effective tax rate differed from the statutory tax rate of 21%, and resulted in a decrease as compared to the 2020 annual effective tax rate, primarily due to a favorable impact of the excess tax benefit from share-based compensation, research and development credits, and the net tax benefit of internal legal entity restructuring for the release of uncertain tax positions, partially offset by an unfavorable impact from non-deductible compensation charges.

Effective January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminates the ability to deduct research and development expenditures and requires those expenditures to be amortized over five years.

While we do not expect this change to materially impact our effective tax rate, it could potentially impact our cash flows and increase the amount of cash taxes we pay.

We recorded an income tax benefit of $8.1 million on a loss before provision for income taxes of $2.5 million, which resulted in an effective tax rate of 330% for the year ended December 31, 2022 compared to an income tax benefit of $11.8 million on income before provision for income taxes of $66.0 million, which resulted in a negative effective tax rate of 18% for the year ended December 31, 2021.

The 2022 annual effective tax rate differed from the statutory tax rate of 21%, primarily due to a favorable impact of the research and development credits, excess tax benefit from share-based compensation, and foreign-derived intangible income (“FDII”) deduction, partially offset by an unfavorable impact from non-deductible compensation charges and global intangible low-taxed income (“GILTI”) inclusion.

Effective January 1, 2022, the Tax Cuts and Jobs Act of 2017 eliminated the ability to deduct research and development expenditures and required those expenditures to be amortized.

While this change has not materially impacted our effective tax rate, the provision has impacted our cash flows and increased the amount of cash taxes we pay.

Refer to Note 17, Income Taxes , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

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(1) The working capital deficit as of December 31, 2021 is primarily due to the reclassification of our convertible senior notes as a current rather than long-term liability.

(1) The working capital deficit balance as of December 31, 2021 was primarily due to the classification of our convertible senior notes as a current rather than long-term liability.

Refer to Note 11, Convertible Senior Notes , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

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In addition, the A&R Credit Agreement includes a letter of credit sub-limit of up to $15.0 million and a swing line loan sub-limit of up to $25.0 million.

On September 22, 2020, the parties entered into an amendment to the A&R Credit Agreement to, among other changes, permit the issuance of the convertible senior notes and the purchase of the convertible note hedge transactions described below, expand our flexibility to repurchase our common stock and make other restricted payments, and replace the total net leverage covenant with a new secured net leverage covenant that required us to maintain a consolidated secured net leverage ratio not to exceed 3.50:1 for the calendar quarters ending September 30, 2020, December 31, 2020, and March 31, 2021 and requires us to maintain a consolidated secured net leverage ratio not to exceed 3.00:1 for the calendar quarters ending thereafter.

2021 and requires us to maintain a consolidated secured net leverage ratio not to exceed 3.00:1 for the calendar quarters ending thereafter.

As of December 31, 2022, there was no outstanding balance for the Revolving Credit Facility and we were in full compliance with all covenants.

Refer to Note 9, Debt and Credit Agreements , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

Refer to Note 10, Debt and Credit Agreement , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

We expect to use future loans under the Revolving Credit Facility, if any, for working capital, potential acquisitions, and other general corporate purposes.

Convertible Senior Notes

On September 25, 2020, we completed a private offering of $575.0 million aggregate principal amount of 0.25% convertible senior notes (the “Notes”), including the exercise in full of the initial purchasers’ option to purchase up to an additional $75.0 million principal amount of the Notes.

We received proceeds from the issuance of the Notes of $559.7 million, net of $15.3 million of transaction fees and other debt issuance costs.

The Notes bear interest at a rate of 0.25% per year, payable semiannually in arrears on March 15 and September 15 of each year, beginning on March 15, 2021.

The Notes are general senior, unsecured obligations of the Company and will mature on September 15, 2025, unless earlier redeemed, repurchased, or converted.

Refer to Note 10, Convertible Senior Notes, of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

During the fourth quarter of 2020, we used approximately $49.3 million of the net proceeds from the offering to pay the cost of the convertible note hedge transactions (partially offset by the proceeds to we received from the sale of the warrant transactions), approximately $53.0 million of the net proceeds to repurchase shares of our common stock from purchasers of the Notes, $150.0 million of the net proceeds to pay down outstanding borrowings under the Revolving Credit Facility, and $225.0 million for the acquisition of the 340B Link Business.

We intend to use the remainder of the net proceeds from this offering for

working capital and other general corporate purposes, which may include potential acquisitions, strategic transactions, and potential future repurchases of our common stock.

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.

Our stock repurchase programs have a total of $54.9 million remaining for future repurchases as of December 31, 2021, which may result in additional use of cash.

Refer to Note 15, Stock Repurchase Program , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

In September 2020, we repurchased 749,300 shares of our common stock from purchasers of the Notes in the offering in privately negotiated transactions effected through one of the initial purchasers or its affiliate at an average price of $70.78 per share for an aggregate purchase price of approximately $53.0 million.

The repurchases were made concurrently with the issuance of the Notes.

The repurchases were separately authorized by the Board of Directors, and did not impact the total remaining for future purchases under the previously authorized stock purchase programs.

There were no stock repurchases during the years ended December 31, 2021 and 2020 including under our stock repurchase programs, other than the separately-authorized one-time stock repurchase concurrent with the offering of the Notes in September 2020.

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

The 2016 Repurchase Program has a total of $2.7 million remaining for future repurchases as of December 31, 2022, which may result in additional use of cash.

During the first quarter of 2022, the 2014 Repurchase Program was completed.

During the year ended December 31, 2022, we repurchased approximately 389,300 shares of our common stock under the repurchase programs at an average price of $134.11 per share for an aggregate purchase price of approximately $52.2 million.

There were no stock repurchases during the year ended December 31, 2021.

Refer to Note 16, Stock Repurchase Programs , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K 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.

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Effect of exchange rate changes on cash and cash equivalents (944) (974)

Net increase (decrease) in cash, cash equivalents, and restricted cash $ (134,300) $ 362,710

Net decrease in cash, cash equivalents, and restricted cash $ (2,785) $ (134,300)

Operating Activities

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Net cash provided by operating activities was $77.8 million for the year ended December 31, 2022, primarily consisting of net income of $5.6 million adjusted for non-cash items of $145.6 million, offset by changes in assets and liabilities of $73.5 million.

The non-cash items primarily consisted of depreciation and amortization expense of $86.9 million, share-based compensation expense of $68.2 million, amortization of operating lease right-of-use assets of $12.2 million, impairment and abandonment of operating lease right-of-use assets related to facilities of $9.4 million, amortization of debt issuance costs of $4.2 million, and a change in deferred income taxes of $37.3 million.

Changes in assets and liabilities include cash outflows from (i) an increase in accounts receivable and unbilled receivables of $60.4 million primarily due to an increase in billings driven by overall business growth and the timing of shipments as well as collections, (ii) an increase in inventories of $30.1 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) an increase in investment in sales-type leases of $15.4 million primarily due to the increase in sales-type lease revenues associated with certain Advanced Services products, (iv) a decrease in operating lease liabilities of $13.8 million, (v) a decrease in accounts payables of $7.8 million primarily due to

an overall decrease in spending during the fourth quarter of 2022, including inventory spending, as well as timing of payments, and (vi) an increase in prepaid expenses of $4.7 million.

These cash outflows were partially offset by (i) an increase in deferred revenues of $24.5 million primarily due to an increase in billings for certain service and subscription offerings, (ii) an increase in accrued liabilities of $16.7 million primarily due to an increase in taxes payable and an increase in general liabilities, (iii) a decrease in other current assets of $6.4 million, (iv) a decrease in other long-term assets of $5.0 million, (v) a decrease in prepaid commissions of $4.3 million, and (vi) an increase in accrued compensation of $2.4 million.

Net cash provided by operating activities was $231.8 million for the year ended December 31, 2021, primarily consisting of net income of $77.8 million adjusted for non-cash items of $157.3 million, offset by changes in assets and liabilities of $3.3 million.

The non-cash items primarily consisted of depreciation and amortization expense of $73.0 million, share-based compensation expense of $53.2 million, amortization of discount on convertible senior notes of $18.6 million, amortization of operating lease right-of-use assets of $11.9 million, amortization of debt issuance costs of $3.4 million, and a change in deferred income taxes of $3.3 million.

Changes in assets and liabilities include cash outflows from (i) an increase in accounts receivable and unbilled receivables of $41.0 million primarily due to an increase in billings driven by overall business growth and the timing of shipments as well as collections, (ii) an increase in inventories of $25.7 million to support forecasted sales, including advanced purchases of certain components, and higher costs of inventory, (iii) a decrease in other long-term liabilities of $14.9 million primarily due to a $6.2 million release of a certain net unrecognized tax benefit as a result of effective settlement with the tax authorities, as well as the release of deferral of certain payroll taxes related to the CARES Act, (iv) a decrease in operating lease liabilities of $12.5 million, (v) an increase in prepaid commissions of $6.9 million primarily

due to timing of bookings and revenue recognition due to larger deal sizes across multiple products, services, and implementations for customers, (vi) an increase in prepaid expenses of $5.7 million, and (vii) an increase in other long-term assets of $3.3 million.

Changes in assets and liabilities include cash outflows from (i) an increase in accounts receivable and unbilled receivables of $41.0 million primarily due to an increase in billings driven by overall business growth and the timing of shipments as well as collections, (ii) an increase in inventories of $25.7 million to support forecasted sales, including advanced purchases of certain components, and higher costs of inventory, (iii) a decrease in other long-term liabilities of $14.9 million primarily due to a $6.2 million release of a certain net unrecognized tax benefit as a result of effective settlement with the tax authorities, as well as the release of deferral of certain payroll taxes related to the Coronavirus Aid, Relief and Economic Security Act, (iv) a decrease in operating lease liabilities of $12.5 million, (v) an increase in prepaid commissions of $6.9 million primarily due to timing of bookings and revenue recognition due to larger deal sizes across multiple products, services, and implementations for customers, (vi) an increase in prepaid expenses of $5.7 million, and (vii) an increase in other long-term assets of $3.3 million.

These cash outflows were partially offset by (i) an increase in accrued liabilities of $34.9 million primarily due to an increase in rebates and lease buyout liabilities, (ii) an increase in accounts payables of $29.1 million primarily due to an overall increase in spending, including inventory spending, as well as timing of payments, (iii) an increase in deferred revenues of $24.2 million primarily due to an increase in billings driven by the timing of shipments in order to meet customers’ implementation schedules and recognition of revenues for products requiring installation, (iv) an increase in accrued compensation of $12.3 million primarily due to an increase in accrued commissions, as well as timing of payroll, (v) a decrease in investment in sales-type leases of $3.3 million, and (vi) a decrease in other current assets of $2.8 million.

Net cash provided by operating activities was $185.9 million for the year ended December 31, 2020, primarily consisting of net income of $32.2 million adjusted for non-cash items of $116.4 million and changes in assets and liabilities of $37.3 million.

The non-cash items primarily consisted of depreciation and amortization expense of $61.1 million, share-based compensation expense of $44.7 million, amortization of operating lease right-of-use assets of $10.5 million, amortization of debt issuance costs of $1.6 million, amortization of discount on convertible senior notes of $4.8 million, and a change in deferred income taxes of $6.5 million.

Changes in assets and liabilities include cash inflows from (i) a decrease in accounts receivable and unbilled receivables of $36.8 million primarily due to higher collections in the fourth quarter of 2020, (ii) a decrease in inventories of $12.4 million primarily due to timing of shipments and a focus on supply chain efficiencies, (iii) an increase in accrued compensation of $11.6 million primarily due to an increase in accrued commissions, as well as timing of payroll, (iv) an increase in deferred revenues of $7.6 million primarily due to the timing of shipments in order to meet customers’ implementation schedules and recognition of revenues for products requiring installation, (v) an increase in other long-term liabilities of $7.5 million primarily due to the deferral of certain payroll taxes related to the CARES Act, and (vi) an increase in accrued liabilities of $4.4 million.

These cash inflows were partially offset by (i) a decrease in operating lease liabilities of $9.5 million, (ii) an increase in prepaid commissions of $8.1 million primarily due to an increase in bookings, (iii) an increase in other long-term assets of $7.7 million primarily due to an increase in unbilled receivables, (iv) an increase in other current assets of $6.4 million, (v) a decrease in accounts payables of $6.3 million primarily due to an overall decrease in spending, as well as timing of payments, (vi) an increase in investment in sales-type leases of $2.9 million, and (vii) an increase in prepaid expenses of $2.1 million.

Investing Activities

Net cash used in investing activities was $58.7 million for the year ended December 31, 2022, which consisted of capital expenditures of $47.5 million for property and equipment, $13.2 million for costs of software development for external use, and $3.4 million consideration paid for the acquisition of Hub and Spoke Innovations, net of cash acquired, partially offset by purchase price adjustments from business acquisitions of $5.5 million.

Net cash used in investing activities was $412.5 million for the year ended December 31, 2021, which consisted of $354.2 million consideration paid for our 2021 acquisitions, net of cash acquired, capital expenditures of $29.0 million for property and equipment, and $29.4 million for costs of software development for external use.

Net cash used in investing activities was $279.9 million for the year ended December 31, 2020, which consisted of $225.0 million consideration paid for the acquisition of the 340B Link Business, capital expenditures of $22.8 million for property and equipment, and $32.0 million for costs of software development for external use.

Financing Activities

Net cash used in financing activities was $21.0 million for the year ended December 31, 2022, primarily due to $52.2 million for repurchases of our stock and $13.5 million in employees’ taxes paid related to restricted stock unit vesting, partially offset by $40.2 million in proceeds from employee stock option exercises and ESPP purchases and a net increase in the customer funds balances of $4.6 million.

Net cash provided by financing activities was $47.4 million for the year ended December 31, 2021, primarily due to $67.3 million in proceeds from employee stock option exercises and ESPP purchases, partially offset by $16.3 million in employees’ taxes paid related to restricted stock unit vesting and a net decrease in the customer funds balances of $3.7 million.

Net cash provided by financing activities was $456.3 million for the year ended December 31, 2020, primarily due to proceeds of $559.7 million from the issuance of the Notes, net of issuance costs, proceeds of approximately $51.3 million from the sale of warrants in connection with the issuance of the Notes, $150.0 million of proceeds under the Revolving Credit Facility, $54.3 million in proceeds from employee stock option exercises and ESPP purchases, and a net increase in the customer funds balances of $4.0 million, partially offset by repayments of $200.0 million under the Revolving Credit Facility, $100.6 million for the purchase of the convertible note hedge in connection with the issuance of the Notes, $53.0 million for repurchases of our stock, $8.7 million in employees’ taxes paid related to restricted stock unit vesting, and payments for debt issuance costs related to the Revolving Credit Facility of $0.6 million.

Contractual Obligations

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(1) Commitments under operating leases relate primarily to leased office buildings, data centers, office equipment, and vehicles.

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Refer to Note 11, Convertible Senior Notes , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

(4) Other commitments include various finance leases and other financing arrangements.

(4) Refer to Note 14, Commitments and Contingencies , of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis