Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                
Commission File No. 000-33043
OMNICELL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
94-3166458
(IRS Employer
Identification No.)
590 East Middlefield Road
Mountain View, CA 94043
(Address of registrant's principal executive offices, including zip code)

(650) 251-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer  o
 
Non-accelerated filer o
 (Do not check if a
smaller reporting company)
 
Smaller reporting company o
 
Emerging growth company  o
              If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitions period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý
As of April 26, 2018, there were 38,877,926 shares of the registrant's common stock, $0.001 par value, outstanding.
 



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OMNICELL, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 

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PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
March 31,
2018
 
December 31,
2017
 
 
(In thousands, except par value)
 
 
ASSETS
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
43,773

 
$
32,424

 
Accounts receivable and unbilled, net of allowances of $5,203 and $5,738, respectively
190,678

 
190,046

 
Inventories
101,868

 
96,137

 
Prepaid expenses
21,161

 
20,392

 
Other current assets
14,751

 
13,273

 
Total current assets
372,231

 
352,272

 
Property and equipment, net
48,290

 
42,595

 
Long-term investment in sales-type leases, net
16,444

 
15,435

 
Goodwill
338,948

 
337,751

 
Intangible assets, net
162,458

 
168,107

 
Long-term deferred tax assets
9,456

 
9,454

 
Prepaid commissions
39,636

 
41,432

 
Other long-term assets
53,492

 
49,316

 
Total assets
$
1,040,955

 
$
1,016,362

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
 
 
 
 
Accounts payable
$
37,859

 
$
48,290

 
Accrued compensation
29,632

 
27,241

 
Accrued liabilities
40,519

 
35,693

 
Long-term debt, current portion, net
17,708

 
15,208

 
Deferred revenue, net
95,709

 
78,774

 
Total current liabilities
221,427

 
205,206

 
Long-term deferred revenue
8,806

 
10,623

 
Long-term deferred tax liabilities
36,320

 
41,446

 
Other long-term liabilities
9,410

 
9,829

 
Long-term debt, net
190,490

 
194,917

 
Total liabilities
466,453

 
462,021

 
Commitments and contingencies (Note 10)


 


 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued

 

 
Common stock, $0.001 par value, 100,000 shares authorized; 48,005 and 47,577 shares issued; 38,860 and 38,432 shares outstanding, respectively
48

 
48

 
Treasury stock at cost, 9,145 shares outstanding
(185,074
)
 
(185,074
)
 
Additional paid-in capital
600,525

 
585,755

 
Retained earnings
162,442

 
159,725

 
Accumulated other comprehensive loss
(3,439
)
 
(6,113
)
 
Total stockholders’ equity
574,502

 
554,341

 
Total liabilities and stockholders’ equity
$
1,040,955

 
$
1,016,362

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands, except per share data)
Revenues:
 
 
 
Product
$
130,104

 
$
98,702

Services and other revenues
52,515

 
49,851

Total revenues
182,619

 
148,553

Cost of revenues:
 
 
 
Cost of product revenues
75,417

 
63,588

Cost of services and other revenues
24,747

 
22,774

Total cost of revenues
100,164

 
86,362

Gross profit
82,455

 
62,191

Operating expenses:
 
 
 
Research and development
16,537

 
16,803

Selling, general and administrative
65,285

 
61,940

Total operating expenses
81,822

 
78,743

Income (loss) from operations
633

 
(16,552
)
Interest and other income (expense), net
(2,729
)
 
(2,456
)
Loss before provision for income taxes
(2,096
)
 
(19,008
)
Benefit from income taxes
(4,816
)
 
(8,673
)
Net income (loss)
$
2,720

 
$
(10,335
)
Net income (loss) per share:
 
 
 
Basic
$
0.07

 
$
(0.28
)
Diluted
$
0.07

 
$
(0.28
)
Weighted-average shares outstanding:
 
 
 
Basic
38,635

 
36,840

Diluted
39,691

 
36,840

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
Net income (loss)
$
2,720

 
$
(10,335
)
Other comprehensive income, net of reclassification adjustments:
 
 
 
   Unrealized gains on interest rate swap contracts, net of tax
202

 
182

   Foreign currency translation adjustments
2,472

 
923

Other comprehensive income
2,674

 
1,105

Comprehensive income (loss)
$
5,394

 
$
(9,230
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
Operating Activities
 
 
 
Net income (loss)
$
2,720

 
$
(10,335
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,310

 
12,448

Share-based compensation expense
6,528

 
5,511

Income tax benefits from employee stock plans

 
11

Deferred income taxes
(5,128
)
 
(8,826
)
Amortization of debt financing fees
573

 
397

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable and unbilled
(632
)
 
21,642

Inventories
(6,881
)
 
(6,933
)
Prepaid expenses
(769
)
 
79

Other current assets
(997
)
 
374

Investment in sales-type leases
(1,491
)
 
1,120

Prepaid commissions
1,796

 
208

Other long-term assets
(1,673
)
 
(9,435
)
Accounts payable
(9,416
)
 
11,104

Accrued compensation
2,391

 
1,955

Accrued liabilities
4,276

 
(115
)
Deferred revenue
15,118

 
8,471

Other long-term liabilities
131

 
506

Net cash provided by operating activities
18,856

 
28,182

Investing Activities
 
 
 
Purchases of intangible assets, intellectual property and patents

 
(160
)
Software development for external use
(5,272
)
 
(4,225
)
Purchases of property and equipment
(9,268
)
 
(2,452
)
Net cash used in investing activities
(14,540
)
 
(6,837
)
Financing Activities
 
 
 
Repayment of debt and revolving credit facility
(2,500
)
 
(40,000
)
Proceeds from stock issuances under stock-based compensation plans
9,541

 
10,916

Employees' taxes paid related to restricted stock units
(1,300
)
 
(1,052
)
Net cash provided by (used in) financing activities
5,741

 
(30,136
)
Effect of exchange rate changes on cash and cash equivalents
1,292

 
651

Net increase (decrease) in cash and cash equivalents
11,349

 
(8,140
)
Cash and cash equivalents at beginning of period
32,424

 
54,488

Cash and cash equivalents at end of period
$
43,773

 
$
46,348

 
 
 
 
Supplemental disclosure of non-cash activities
 
 
 
Unpaid purchases of property and equipment
$
676

 
$
865

Effect of adoption of ASU No. 2016-09, "Compensation - Stock Compensation (Topic 718)"
$

 
$
1,582

 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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OMNICELL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Organization and Summary of Significant Accounting Policies
Business
Omnicell, Inc. was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. The Company's major products are automated medication, supply control systems and medication adherence solutions which are sold in its principal market, which is the healthcare industry. The Company's market is primarily located in the United States and Europe. "Omnicell" or the "Company" collectively refer to Omnicell, Inc. and its subsidiaries.
Basis of presentation
The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of the Company as of March 31, 2018 and December 31, 2017, the results of its operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2018 and March 31, 2017. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company's annual report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 27, 2018, except as discussed in the "Revenue recognition" below. The Company's results of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2018 are not necessarily indicative of results that may be expected for the year ending December 31, 2018, or for any future period.
Certain prior year amounts have been adjusted to conform with the adoption of ASC 606, Revenue from Contracts with Customers ("ASC 606"), which became effective for the Company beginning on January 1, 2018. Refer to "Recently adopted authoritative guidance" for the effects of adoption of ASC 606 and the section below for the updated revenue recognition policy.
Principles of consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Revenue recognition
The Company earns revenues from sales of its medication and medical and surgical supply automation systems along with consumables and related services, which are sold in the healthcare industry, our principal market. The transaction price of each contract with a customer is allocated to identified performance obligations based on the relative fair value of each obligation. The Company's customer arrangements typically include one or more of the following performance obligations:
Products. Software-enabled equipment that manages and regulates the storage and dispensing of pharmaceuticals, consumable blister cards and packaging equipment and other medical supplies.
Software. Additional software applications that enable incremental functionality of its equipment.
Installation. Installation of equipment as integrated systems at customers' sites.
Post-installation technical support. Phone support, on-site service, parts and access to unspecified software updates and enhancements, if and when available.
Professional services. Other customer services, such as training and consulting.
Prior to recognizing revenue, the Company identifies the contract, performance obligations, and transaction price, and allocates the transaction price to the performance obligations. All identified contracts meet the following required criteria:
Parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. A majority of the Company’s contracts are

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evidenced by a non-cancelable written agreement. Contracts for consumable products are generally evidenced by an order placed via phone or a manual purchase order.
Entity can identify each party’s rights regarding the goods or services to be transferred. Contract terms are documented within the written agreements. Where a written contract does not exist, such as for consumable products, the rights of each party are understood as following our standard business process and terms.
The entity can identify the payment terms for the goods or services to be transferred. Payment terms are documented within the agreement and are generally net 30 days from shipment of tangible product or services performed. Where a written contract does not exist, the Company’s standard payment terms are net 30 day terms.
The contract has commercial substance (that is the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract.) The Company's agreements are an exchange of cash for a combination of products and services which result in changes in the amount of the Company’s future cash flows.
It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. The Company performs a credit check for all significant customers or transactions and where collectability is not probable, payment in full or a substantial down payment is typically required to help assure the full agreed upon contract price will be collected.
The Company often enters into change orders which modify the product to be received by the customer pursuant to certain contracts. Changes to any contract are accounted for as a modification of the existing contract to the extent the goods and services to be delivered as part of the contract are generally consistent with the nature and type of those to be provided under the terms of the original contract. Examples of such change orders include the addition or removal of units of equipment or changes to the configuration of the equipment where the overall nature of the contract remains intact. The Company’s change orders generally result in the change being accounted for as modifications of existing contracts given the nature of the impacted orders.
Distinct goods or services are identified as performance obligations. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer are considered a single performance obligation. Where a good or service is determined not to be distinct, the Company combines the good or service with other promised goods or services until a bundle of goods or services that is distinct is identified. To identify its performance obligations, the Company considers all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. When performance obligations are included in separate contracts, the Company considers an entire customer arrangement to determine if separate contracts should be considered combined for the purposes of revenue recognition. Most of the Company’s sales, other than renewals of support and maintenance, contain multiple performance obligations, with a combination of hardware systems, consumables and software products, support and maintenance, and professional services.

The transaction price of a contract is determined based on the fixed consideration, net of an estimate for variable consideration such as various discounts or rebates provided to customers. As a result of the Company’s commercial selling practices, contract prices are generally fixed with minimal, if any, variable consideration.

The transaction price is allocated to separate performance obligations proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price the Company charges for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, the Company’s products and services are not generally sold separately. The Company uses an expected cost plus a margin approach to identify the standalone selling price of goods where separate sales transactions do not exist. For software and services which do not have a specific identifiable product cost, the Company uses a discounted from the list price amount as a best estimated selling price.

The Company recognizes revenue when the performance obligation has been satisfied by transferring a promised good or service to a customer. The good or service is transferred when or as the customer obtains control of the good or service. Determining when control transfers requires management to make judgments that affect the timing of revenue recognized. Generally, for products requiring a complex implementation, control passes when the product is installed and ready for use. For all other products, control generally passes when product has been shipped and title has passed. For maintenance contracts and certain other services provided on a subscription basis, control passes to the customer over time, generally ratably over the service term as the Company provides a stand-ready service to service the customer’s equipment. Time and material services transfer control to the customer at the time the services are provided. The portion of the transaction price allocated to the Company’s unsatisfied performance obligation at March 31, 2018 and December 31, 2017 was $104.5 million and $89.4 million, respectively, of which $95.7 million and $78.8 million, respectively, was expected to be completed within one year.

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Remaining performance obligations primarily relate to maintenance contracts and are recognized ratably over the remaining term of the contract, generally not more than five years.

Revenues, contract assets and contract liabilities are recorded net of associated taxes.

The payment terms associated with the Company’s contracts vary, however, payment terms for product revenue are generally based on milestones tied to contract signing, shipment of products and/or customer acceptance. Payment terms associated with the service portion of agreements are generally periodic and can be billed on a monthly, quarterly or annual basis. In certain circumstances multiple years are billed at one time. The portion of these contract liabilities not expected to be recognized as revenue within twelve months of the balance sheet date are considered long term.

In the normal course of business, the Company typically does not accept product returns unless the item is defective as manufactured or the configuration of the product is incorrect. The Company establishes provisions for estimated returns based on historical product returns. The allowance for sales returns is not material to the Condensed Consolidated Financial Statements for any periods presented.

A portion of the Company's sales are made through multi-year lease agreements. Under sales-type leases, the Company recognizes revenue for its hardware and software products net of lease execution costs, such as post-installation product maintenance and technical support, at the net present value of the lease payment stream once its installation obligations have been met. The Company optimizes cash flows by selling a majority of its non-U.S. government leases to third-party leasing finance companies on a non-recourse basis. The Company has no obligation to the leasing company once the lease has been sold. Some of the Company's sales-type leases, mostly those relating to U.S. government hospitals which comprise approximately 40% of the lease receivable balance, are retained in-house. Revenue from sales-type leases of $9.8 million and $3.2 million for the three months ended March 31, 2018 and 2017, respectively, is included in product revenue in the Condensed Consolidated Statements of Operations. Interest income in these leases is recognized in product revenue using the effective interest method.

A portion of the Company’s sales are made to customers who are members of Group Purchasing Organizations ("GPOs"). GPOs are often owned fully or in part by the Company’s customers and the Company pays fees to the GPO on completed contracts. The Company considers these fees consideration paid to customers and records them as reductions to revenue. Fees to GPOs were $1.9 million and $2.1 million for the quarters ended March 31, 2018 and 2017, respectively.

Contract assets and contract liabilities

A contract asset is a right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional and is not just subject to the passage of time. A receivable will be recorded on the balance sheet when the Company has unconditional rights to consideration. A contract liability is an obligation to transfer goods or services for which the Company has received consideration, or for which an amount of consideration is due from the customer. Contract liabilities include customer deposits under non-cancelable contracts and current and non-current deferred revenue balances. The Company’s contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
The following table reflects the Company’s contract assets and contract liabilities:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
 
 
 
 
Short-term unbilled receivable - included in accounts receivable and unbilled
$
4,859

 
$
4,590

Long-term unbilled receivable - included in other long-term assets
10,877

 
9,475

Total contract assets
$
15,736

 
$
14,065

 
 
 
 
Short-term deferred revenue
$
95,709

 
$
78,774

Long-term deferred revenue
8,806

 
10,623

Total contract liabilities
$
104,515

 
$
89,397

 
 
 
 

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Significant changes in the contract assets and the contract liabilities balances during the period are the result of the issuance of invoices and recognition of deferred revenue in the normal course of business. Unbilled contract assets which were invoiced during the three months ended March 31, 2018 as a result of the right to invoice for the transaction consideration becoming unconditional were not material. The contract modifications entered into during the three months ended March 31, 2018, did not have a significant impact on the Company’s contract assets or deferred revenues. During the three months ended March 31, 2018, the Company recognized revenue of $46.6 million that was included in the corresponding deferred revenue balance as of December 31, 2017.

Contract costs
The Company has determined that the incentive portions of its sales commission plans require capitalization since these payments are directly related to sales achieved during a time period. These commissions are earned on the basis of the total purchase order value of new product bookings. Since there are not commensurate commissions earned on renewal of the service bookings, the Company concluded that the capitalized asset is related to services provided under both the initial contract and renewal periods. The Company applies a practical expedient to account for the incremental costs of obtaining a contract to a portfolio of contracts with similar characteristics as the Company expects the effect on the financial statements of applying the practical expedient would not differ materially from applying the accounting guidance to the individual contracts within the portfolio. A pool of contracts is defined as all contracts booked in a particular quarter. The amortization for the capitalized asset is an estimate of the pool’s original contract term, generally one to five years, plus an estimate of future customer renewal periods resulting in a total amortization period of ten years. Costs to obtain a contract are allocated amongst performance obligations and recognized as sales and marketing expense consistent with the pattern of revenue recognition. Capitalized costs are periodically reviewed for impairment. A portion of the pool’s capitalized asset is recorded as an expense after two quarters, which represents the estimated period during which the product revenue associated with the contract is recorded. The remaining contract cost is recorded as expense ratably over the ten year estimated initial and renewal service periods. During the three months ended March 31, 2018 and March 31, 2017, the Company recognized contract cost expense of $5.6 million and $4.1 million, respectively. The portion of commission expenses paid as of the balance sheet date to be recognized in future periods is recorded in long term prepaid commissions expense on the Condensed Consolidated Balance Sheets. There was no impairment loss in relation to the costs capitalized during the three months ended March 31, 2018.
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company's Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company's critical accounting policies are those that affect its financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, accounts receivable and notes receivable from investment in sales-type leases, inventory valuation, capitalized software development costs, valuation and impairment of goodwill, purchased intangibles and long-lived assets, fair value of assets acquired and liabilities assumed in business combination, share-based compensation, and accounting for income taxes.
Segment reporting
The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company's segments using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs that are not specific to either of the reportable segments and are managed separately at the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain other administrative expenses. See Note 14, Segment and Geographical Information, for additional information on segment reporting.
Recently adopted authoritative guidance
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASC 606, Revenue from Contracts with Customers, a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We adopted the standard using the full retrospective method effective beginning January 1, 2018.

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Under the ASC 606 guidance, fees paid to GPOs are now presented as a reduction of Product Revenue, whereas these fees were considered a part of Selling, General and Administrative costs under the previous guidance. The majority of the incremental costs incurred to obtain a contract, primarily commission expense, are recognized during the first year with the balance recognized ratably over a period of ten years. Additionally, revenue on term software licenses is recognized upon installation of the license rather than ratably over the life of the term license. Finally, the Company no longer defers the contingent revenue in transactions where the amount charged to the customer for a particular performance obligation is less than the allocation of standalone selling price. Adoption of the standard related to revenue recognition impacted our reported results for the three months period, as follows:
 
March 31, 2017
 
As reported
 
Adjustment
 
As adjusted
 
(In thousands)
Revenue
 
 
 
 
 
Automation and Analytics
$
124,171

 
$
(2,001
)
 
$
122,170

Medication Adherence
26,383

 

 
26,383

Gross profit
 
 
 
 
 
Automation and Analytics
55,410

 
(2,001
)
 
53,409

Medication Adherence
8,782

 

 
8,782

Selling, general and administrative expenses
64,625

 
(2,685
)
 
61,940

Provision for income taxes
(8,938
)
 
265

 
(8,673
)
Net income
$
(10,754
)
 
$
419

 
$
(10,335
)
Earnings per share
$
(0.29
)
 
$
0.01

 
$
(0.28
)
 
December 31, 2017
 
As reported
 
Adjustment
 
As adjusted
 
(In thousands)
Accounts receivable and unbilled, net
$
189,227

 
$
819

 
$
190,046

Prepaid expenses
36,060

 
(15,668
)
 
20,392

Prepaid commissions

 
41,432

 
41,432

Other long-term assets
39,841

 
9,475

 
49,316

Deferred revenue, net
86,104

 
(7,330
)
 
78,774

Long-term, deferred revenue
17,244

 
(6,621
)
 
10,623

Long-term, deferred tax liabilities
28,579

 
12,867

 
41,446

Stockholders' equity
517,199

 
37,142

 
554,341

Recently issued authoritative guidance
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits the reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 on items within accumulated other comprehensive income to retained earnings. These amounts are commonly referred to as “stranded tax effects”. ASU 2018-02 will be effective for the Company beginning January 1, 2019. The Company is currently in the process of evaluating the impact of adoption on the consolidated financial statements.
There was no other recently issued and effective authoritative guidance that is expected to have a material impact on the Company's Condensed Consolidated Financial Statements through the reporting date.
Note 2. Business Acquisitions
2017 Acquisitions
On April 12, 2017, the Company completed the acquisition of all of the membership interest of Dixie Drawl, LLC d/b/a InPharmics ("InPharmics"). InPharmics is a technology and services company that provides advanced pharmacy informatics solutions to hospital pharmacies. The total consideration for the transaction was $5.0 million, net of cash acquired of $0.3 million, and includes $0.5 million holdback for potential settlement of performance obligations. At March 31, 2018, this amount has been presented as a short-term liability. The Company accounted for the acquisition of InPharmics in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities

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assumed were recorded at fair value on the acquisition date. The purchase price was preliminary allocated to intangible assets in the amount of $1.9 million, which included developed technology and customer contracts, with the remainder allocated to goodwill. The results of the InPharmics' operations have been included in our consolidated results of operations, and presented as part of the Automation and Analytics segment.
Note 3. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares outstanding during the period, less shares repurchased. In periods of net loss, all potential common shares are anti-dilutive, so diluted net loss per share equals the basic net loss per share. In periods of net income, diluted net income per share is computed by dividing net income for the period by the basic weighted-average number of shares plus any dilutive potential common stock outstanding during the period. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards and restricted stock units computed using the treasury stock method. Any anti-dilutive weighted-average dilutive shares related to stock award plans are excluded from the computation of the diluted net income per share.
The basic and diluted net income (loss) per share calculation for the three months ended March 31, 2018 and 2017 was as follows:
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands, except per share data)
Net income (loss)
$
2,720

 
$
(10,335
)
Weighted-average shares outstanding — basic
38,635

 
36,840

Effect of dilutive securities from stock award plans
1,056

 

Weighted-average shares outstanding — diluted
$
39,691

 
$
36,840

Net income (loss) per share - basic
$
0.07

 
$
(0.28
)
Net income (loss) per share - diluted
$
0.07

 
$
(0.28
)
 
 
 
 
Anti-dilutive weighted-average shares related to stock award plans
1,113

 
4,236

Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $43.8 million and $32.4 million as of March 31, 2018 and December 31, 2017, respectively, consisted of demand deposits only.
Interest Rate Swap Contracts
The Company uses interest rate swap agreements to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company's interest rate swaps, which are designated as cash flow hedges, involve the receipt of variable amounts from counterparties in exchange for the Company making fixed-rate payments over the life of the agreements. The Company does not hold or issue any derivative financial instruments for speculative trading purposes.
During 2016, the Company entered into an interest rate swap agreement with a combined notional amount of $100.0 million with one counter-party that became effective on June 30, 2016 and is maturing on April 30, 2019. The swap agreement requires the Company to pay a fixed rate of 0.8% and provides that the Company will receive a variable rate based on the one month LIBOR rate subject to a LIBOR floor of 0.0%. Amounts payable by or due to the Company will be net settled with the respective counter-party on the last business day of each month, commencing July 31, 2016.
The fair value of the interest rate swap agreements at March 31, 2018 and December 31, 2017 was $1.5 million and $1.4 million, respectively. There were no amounts reclassified into current earnings due to ineffectiveness during the periods presented.
Fair value hierarchy
The Company measures its financial instruments at fair value. The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy as they are valued primarily using quoted market prices utilizing market observable inputs.

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The Company's interest rate swap contracts and foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of March 31, 2018:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Interest rate swap contracts
$

 
$
1,464

 
$

 
$
1,464

Total financial assets
$

 
$
1,464

 
$

 
$
1,464

There were no transfers between fair value measurement levels during the three months ended March 31, 2018 and March 31, 2017.
The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of December 31, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Interest rate swap contracts

$

 
$
1,378

 
$

 
$
1,378

Total financial assets
$

 
$
1,378

 
$

 
$
1,378

Net investment in sales-type leases. The carrying amount of the Company's sales-type lease receivables is a reasonable estimate of fair value, as the unearned interest income is immaterial.
Note 5. Balance Sheet Components
Balance sheet details as of March 31, 2018 and December 31, 2017 are presented in the tables below:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Inventories:
 
 
 
Raw materials
$
25,103

 
$
22,750

Work in process
9,959

 
9,818

Finished goods and service parts
66,806

 
63,569

Total inventories
$
101,868

 
$
96,137

 
 
 
 
Property and equipment:
 
 
 
Equipment
$
72,122

 
$
69,550

Furniture and fixtures
6,750

 
6,534

Leasehold improvements
14,540

 
10,976

Software
38,840

 
37,168

Construction in progress
11,334

 
9,813

Property and equipment, gross
143,586

 
134,041

Accumulated depreciation and amortization
(95,296
)
 
(91,446
)
Total property and equipment, net
$
48,290

 
$
42,595

 
 
 
 
Other long term assets:
 
 
 
Capitalized software, net
$
41,146

 
$
38,599

Unbilled receivable
10,877

 
9,475

Other assets
1,469

 
1,242

Total other long term assets, net
$
53,492

 
$
49,316


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March 31,
2018
 
December 31,
2017
 
 
 
 
Accrued liabilities:
 
 
 
Advance payments from customers
$
6,879

 
$
7,779

Rebates and lease buyouts
5,342

 
5,428

Group purchasing organization fees
3,439

 
3,449

Taxes payable
12,135

 
9,183

Other accrued liabilities
12,724

 
9,854

Total accrued liabilities
$
40,519

 
$
35,693

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2018 and 2017:
 
Three months ended March 31,
 
2018
 
2017
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
(In thousands)
Beginning balance
$
(6,954
)
 
$
841

 
$
(6,113
)
 
$
(10,764
)
 
$
1,245

 
$
(9,519
)
     Other comprehensive income (loss) before reclassifications
2,472

 
401

 
2,873

 
923

 
176

 
1,099

     Amounts reclassified from other comprehensive income (loss), net of tax

 
(199
)
 
(199
)
 

 
6

 
6

     Net current-period other comprehensive income (loss), net of tax
2,472

 
202

 
2,674

 
923

 
182

 
1,105

Ending balance
$
(4,482
)
 
$
1,043

 
$
(3,439
)
 
$
(9,841
)
 
$
1,427

 
$
(8,414
)
 
 
 
 
 
 
 
 
 
 
 
 
Note 6. Net Investment in Sales-Type Leases
On a recurring basis, we enter into sales-type lease transactions with the majority varying in length from one to five years. The receivables as a result of these types of transactions are collateralized by the underlying equipment leased and consist of the following components at March 31, 2018 and December 31, 2017:  
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Net minimum lease payments to be received
$
26,789

 
$
25,899

  Less: Unearned interest income portion
(2,056
)
 
(1,695
)
Net investment in sales-type leases
24,733

 
24,204

  Less: Short-term portion(1)
(8,289
)
 
(8,769
)
Long-term net investment in sales-type leases
$
16,444

 
$
15,435

(1) The short-term portion of the net investments in sales-type leases is included in other current assets in the Condensed Consolidated Balance Sheets.
The Company evaluates its sales-type leases individually and collectively for impairment. The allowance for credit losses were $0.2 million as of March 31, 2018 and December 31, 2017.

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At March 31, 2018, the future minimum lease payments under sales-type leases were as follows:
 
March 31,
2018
 
(In thousands)
Remaining nine months of 2018
$
5,293

2019
7,872

2020
1,938

2021
5,203

2022
3,386

Thereafter
3,097

Total
$
26,789

Note 7. Goodwill and Intangible Assets
Goodwill
The following table represents changes in the carrying amount of goodwill:
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Net balance as of December 31, 2017
$
220,851

 
$
116,900

 
$
337,751

  Foreign currency exchange rate fluctuations
831

 
366

 
1,197

Net balance as of March 31, 2018
$
221,682

 
$
117,266

 
$
338,948

Intangible assets, net
The carrying amounts of intangible assets as of March 31, 2018 and December 31, 2017 were as follows:
 
March 31, 2018
 
Gross
carrying
amount
 
Accumulated
amortization
 
 Foreign currency exchange rate fluctuations
 
Net
carrying
amount
 
Useful life
(years)
 
(In thousands, except for years)
Customer relationships
$
133,950

 
$
(36,356
)
 
$
314

 
$
97,908

 
1 - 30
Acquired technology
74,371

 
(23,359
)
 
203

 
51,215

 
3 - 20
Backlog
21,712

 
(18,424
)
 

 
3,288

 
1 - 4
Trade names
8,662

 
(4,861
)
 
38

 
3,839

 
1 - 12
Patents
3,236

 
(1,390
)
 
12

 
1,858

 
2 - 20
Non-compete agreements
1,900

 
(1,450
)
 

 
450

 
3
In-process technology
3,900

 

 

 
3,900

 
Total intangibles assets, net
$
247,731

 
$
(85,840
)
 
$
567

 
$
162,458

 
 
 

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December 31, 2017
 
Gross carrying
amount
 
Accumulated
amortization
 
 Foreign currency exchange rate fluctuations
 
Net
carrying
amount
 
Useful life
(years)
 
(In thousands, except for years)
Customer relationships
$
133,913

 
$
(33,526
)
 
$
65

 
$
100,452

 
1 - 30
Acquired technology
74,593

 
(21,523
)
 
34

 
53,104

 
3 - 20
Backlog
21,712

 
(17,544
)
 

 
4,168

 
1 - 5
Trade names
8,716

 
(4,719
)
 
6

 
4,003

 
1 - 12
Patents
3,296

 
(1,418
)
 
2

 
1,880

 
2 - 20
Non-compete agreements
1,900

 
(1,300
)
 

 
600

 
3
In-process technology
3,900

 

 

 
3,900

 
Total intangibles assets, net
$
248,030

 
$
(80,030
)
 
$
107

 
$
168,107

 
 
Amortization expense of intangible assets was $6.0 million and $6.5 million for the three months ended March 31, 2018 and 2017, respectively.
The estimated future amortization expenses for amortizable intangible assets are as follows:
 
March 31, 2018
 
(In thousands)
Remaining nine months of 2018
$
17,463

2019
18,036

2020
16,832

2021
15,378

2022
14,009

Thereafter (excluding in-process technology)
76,840

Total
$
158,558

Note 8. Debt
On January 5, 2016, the Company entered into a $400 million senior secured credit facility pursuant to a credit agreement, by and among the Company, the lenders from time to time party thereto, Wells Fargo Securities, LLC, as Sole Lead Arranger and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”). The Credit Agreement provides for (a) a five-year revolving credit facility of $200 million, which was subsequently increased pursuant to the amendment discussed below (the “Revolving Credit Facility”) and (b) a five-year $200 million term loan facility (the “Term Loan Facility” and together with the Revolving Credit Facility, the “Facilities”). In addition, the Credit Agreement includes a letter of credit sub-limit of up to $10 million and a swing line loan sub-limit of up to $10 million. The Credit Agreement expires on January 5, 2021, upon which date all remaining outstanding borrowings are due and payable.
 Loans under the Facilities bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR Rate, plus an applicable margin ranging from 1.50% to 2.25% per annum based on the Company’s consolidated total net leverage ratio (as defined in the Credit Agreement), or (b) an alternate base rate equal to the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, and (iii) LIBOR for an interest period of one month, plus an applicable margin ranging from 0.50% to 1.25% per annum based on the Company’s consolidated total net leverage ratio (as defined in the 2016 Credit Agreement). Undrawn commitments under the Revolving Credit Facility will be subject to a commitment fee ranging from 0.20% to 0.35% per annum based on the Company’s consolidated total net leverage ratio on the average daily unused portion of the Revolving Credit Facility. A letter of credit participation fee ranging from 1.50% to 2.25% per annum based on the Company’s consolidated total net leverage ratio will accrue on the average daily amount of letter of credit exposure.
 The Company is permitted to make voluntary prepayments at any time without payment of a premium or penalty, except for any amounts relating to the LIBOR breakage indemnity described in the Credit Agreement. The Company is required to make mandatory prepayments under the Term Loan Facility with (a) net cash proceeds from any issuances of debt (other than certain permitted debt) and (b) net cash proceeds from certain asset dispositions (other than certain asset dispositions) and insurance and condemnation events (subject to reinvestment rights and certain other exceptions). Loans under the Term Loan Facility will amortize in quarterly installments, equal to 5% per annum of the original principal amount thereof

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during the first two years, which shall increase to 10% per annum during the third and fourth years, and 15% per annum during the fifth year, with the remaining balance payable on January 5, 2021. The Company is required to make mandatory prepayments under the Revolving Credit Facility if at any time the aggregate outstanding principal amount of loans together with the total amount of outstanding letters of credit exceeds the aggregate commitments, with such mandatory prepayment to be equal to the amount of such excess.
 The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, dividends and other distributions. The Credit Agreement contains financial covenants that require the Company and its subsidiaries to not exceed a maximum consolidated total leverage ratio and maintain a minimum fixed charge coverage ratio. The Company’s obligations under the Credit Agreement and any swap obligations and banking services obligations owing to a lender (or an affiliate of a lender) are guaranteed by certain of its domestic subsidiaries and secured by substantially all of its and the subsidiary guarantors’ assets. In connection with entering into the Credit Agreement, and as a condition precedent to borrowing loans thereunder, the Company and certain of the Company’s other direct and indirect subsidiaries have entered into certain ancillary agreements, including, but not limited to, a collateral agreement and subsidiary guaranty agreement.
On April 11, 2017, the parties entered into the First Amendment to Credit Agreement and Collateral Agreement (the "Amended Credit Agreement"). Under this amendment, (i) the maximum capital expenditures limit in any fiscal year for property, plant and equipment and software development increased from $35.0 million to $45.0 million, and (ii) the maximum limit for non-permitted investments increased from $10.0 million to $20.0 million.
On December 26, 2017, the parties entered into another amendment (the "Amendment") to the Amended Credit Agreement. Pursuant to the Amendment, the Revolving Credit Facility provided for under the Amended Credit Agreement, was increased from $200.0 million to $315.0 million and certain other modifications to the Amended Credit Agreement were made, including amendments to certain negative covenants.
In connection with these Facilities, the Company incurred $10.1 million of debt issuance costs. The debt issuance costs were capitalized and presented as a direct deduction from the carrying amount of that debt liability in accordance with the accounting guidance. The debt issuance costs are being amortized to interest expense using the straight line method from issuance date through 2021. Interest expense (exclusive of fees and issuance cost amortization) was approximately $1.9 million and $1.5 million for the three months ended March 31, 2018 and 2017, respectively. Amortization expense related to fees and issuance cost was approximately$0.6 million and $0.4 million for the three months ended March 31, 2018 and 2017, respectively. The Company was in compliance with all covenants as of March 31, 2018 and December 31, 2017.
As of March 31, 2018 the Company has repaid $139.5 million borrowed under these Facilities, which includes $2.5 million repaid during the three months ended March 31, 2018. The components of the Company’s debt obligations as of March 31, 2018 and December 31, 2017 are as follows:
 
December 31, 2017
 
Borrowings
 
Repayment / Amortization
 
March 31, 2018
 
(In thousands)
Term loan facility
$
182,500

 
$

 
$
(2,500
)
 
$
180,000

Revolving credit facility
34,500

 

 

 
34,500

   Total debt under the facilities
217,000

 

 
(2,500
)
 
214,500

   Less: Deferred issuance cost
(6,875
)
 

 
573

 
(6,302
)
   Total Debt, net of deferred issuance cost
$
210,125

 
$

 
$
(1,927
)
 
$
208,198

 Long term debt, current portion, net of deferred issuance cost
15,208

 
 
 
 
 
17,708

   Long term debt, net of deferred issuance cost
$
194,917

 
 
 
 
 
$
190,490

As of March 31, 2018, the carrying amount of debt of $214.5 million approximates the comparable fair value of $217.6 million. The Company's debt facilities are classified as a Level 3 in the fair value hierarchy. The calculation of the fair value is based on a discounted cash flow model using observable market inputs and taking into consideration variables such as interest rate changes, comparable instruments, and long-term credit ratings.

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Note 9. Deferred revenue
Short-term deferred revenue of $95.7 million and $78.8 million includes deferred revenue from product sales and service contracts, net of deferred cost of sales of $15.7 million and $16.9 million as of March 31, 2018 and December 31, 2017, respectively. The short-term deferred revenues from product sales relate to delivered and invoiced products, pending installation and acceptance, expected to occur within the next twelve months.
Long-term deferred revenue includes deferred revenue from service contracts of $8.8 million and $10.6 million, as of March 31, 2018 and December 31, 2017, respectively.
Note 10. Commitments and Contingencies
Lease commitments
The Company leases office space and office equipment under operating leases. Commitments under operating leases primarily relate to leasehold property and office equipment. At March 31, 2018, the minimum future payments on non-cancelable operating leases were as follows:
 
(In thousands)
Remaining nine months of 2018
$
8,896

2019
11,763

2020
10,803

2021
10,515

2022
8,818

Thereafter
26,383

Total minimum future lease payments
$
77,178

 
Purchase obligations
In the ordinary course of business, the Company issues purchase orders based on its current manufacturing needs. At March 31, 2018, the Company had non-cancelable purchase commitments of $55.4 million, which are expected to be paid within the next twelve months. 
Legal Proceedings
The Company is currently involved in various legal proceedings. As required under ASC 450, Contingencies, the Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss. The Company has not recorded any accrual for contingent liabilities associated with the legal proceedings described below based on its belief that any potential loss, while reasonably possible, is not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. The Company believes that it has valid defenses with respect to legal proceedings pending against it. However, litigation is inherently unpredictable, and it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of this contingency or because of the diversion of management's attention and the creation of significant expenses.
On January 10, 2018, a lawsuit was filed against a number of individuals, governmental agencies and corporate entities, including the Company and one of its subsidiaries, Aesynt Incorporated (“Aesynt”), in the Circuit Court for the City of Richmond, Virginia, captioned Ruth Ann Warner, as Guardian of Jonathan James Brewster Warner v. Centra Health, Inc., et al. (Case No. CL18-152-1). The complaint seeks monetary recovery of compensatory and punitive damages in addition to certain declaratory relief based upon, as against the individuals, governmental agencies and corporate entities other than the Company and Aesynt, allegations of the use of excessive force, unlawful detention, false imprisonment, battery, simple and gross negligence and negligent hiring, detention and training and, as against the Company and Aesynt, claims of product liability, negligence and breach of implied warranties. The Company and Aesynt have not yet been served with the complaint. The Company intends to defend the lawsuit vigorously.
Note 11. Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (the "Act") was signed into law, most provisions of which became effective starting in 2018, including the reduction of the statutory corporate income tax rate from 35% to 21%. As of March 31, 2018, the Company has not completed the accounting for the tax effects of enactment of the Act; however, in the fourth quarter of 2017, the Company made a reasonable estimate of the effects on the existing deferred tax balances and the one-time

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Table of Contents

transition tax. No adjustments to the provisional amounts recorded in the fourth quarter of 2017 have been made during the three months ended March 31, 2018. In the current quarter, the Company assessed the effect of certain international provisions of the Act that became effective January 1, 2018, and determined that these provisions had an immaterial impact, therefore, the Company did not record any impact as a result of the assessment. The Company will continue to analyze the provision for income taxes under the Act as future guidance is issued. Any revisions will be treated in accordance with the measurement period guidance outlined in Staff Accounting Bulletin No. 118.
The Company generally provides for income taxes in interim periods based on the estimated annual effective tax rate for the year, adjusting for discrete items in the quarter in which they arise. The annual effective tax rate before discrete items was 18% and 39% for the three months ended March 31, 2018 and March 31, 2017, respectively.
The 2018 annual effective tax rate differed from the statutory rate of 21% primarily due to the unfavorable impact of state income taxes, non-deductible expenses and non-deductible equity charges, which were partially offset by the favorable impact of the Research & Development credits and foreign rate differential. The 2017 annual effective tax rate differed from the statutory rate of 35% primarily due to the unfavorable impact of state income taxes, foreign rate differential, and non-deductible equity charges, which were partially offset by the domestic production activities deduction and the Research & Development credits.
As of March 31, 2018 and December 31, 2017, the Company had gross unrecognized tax benefits of $11.6 million and $10.7 million, respectively. It is the Company’s policy to classify accrued interest and penalties as part of the unrecognized tax benefits, but to record interest and penalties in operating expense. As of March 31, 2018 and December 31, 2017, the amount of accrued interest and penalties was $1.5 million and $1.4 million, respectively.
The Company files income tax returns in the United States and various states and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities, including major jurisdictions such as the United States, Germany, Italy, Netherlands and the United Kingdom. With few exceptions, as of March 31, 2018, the Company is no longer subject to U.S., state, and foreign examination for years before 2014, 2013, and 2014.
Although the Company believes it has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved.  It is not possible at this time to reasonably estimate changes in the unrecognized tax benefits within the next twelve months.
Note 12. Employee Benefits and Share-Based Compensation
Stock based plans
For a detailed explanation of the Company's stock plans and subsequent changes, please refer to Note 11, Employee Benefits and Share-Based Compensation, of the Company's Annual Report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 27, 2018.    
Share-based compensation expense
The following table sets forth the total share-based compensation expense recognized in the Company's Condensed Consolidated Statements of Operations:
 
Three months ended
 
March 31, 2018
 
March 31, 2017
 
(In thousands)
Cost of product and service revenues
$
1,019

 
$
982

Research and development
1,234

 
897

Selling, general and administrative
4,275

 
3,632

Total share-based compensation expense
$
6,528

 
$
5,511

Stock Options and ESPP Shares
The following assumptions were used to value share options and Employee Stock Purchase Plan ("ESPP") shares granted pursuant to the Company's equity incentive plans for the three months ended March 31, 2018 and 2017:

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Table of Contents

 
Three months ended
 
March 31, 2018
 
March 31, 2017
Stock Option Plans
 
 
 
Expected life, years
4.79

 
4.67

Expected volatility, %
32.2
%
 
31.1
%
Risk free interest rate, %
2.57
%
 
1.89
%
Estimated forfeiture rate %
6.9
%
 
7.7
%
Dividend yield, %
%
 
%
 
Three months ended
 
March 31, 2018
 
March 31, 2017
Employee Stock Purchase Plan
 
 
 
Expected life, years
0.5-2.0

 
0.5-2.0

  Expected volatility, %
27.7-33.8%

 
25.8-32.8%

  Risk free interest rate, %
0.70-2.25%

 
0.52-1.31%

  Dividend yield, %
%
 
%
Stock Options activity
The following table summarizes the share option activity under the Company’s equity incentive plans during the three months ended March 31, 2018:
 
Number of
Shares
 
Weighted-Average
Exercise Price
 
Weighted-Average
Remaining Years
 
Aggregate
Intrinsic Value
 
(In thousands, except per share data)
Stock Options
 
 
 
 
 
 
 
Outstanding at December 31, 2017
3,323

 
$
32.72

 
7.6
 
$
53,953

Granted
482

 
44.38

 
 
 
 
Exercised
(87
)
 
22.50

 
 
 
 
Expired
(1
)
 
24.09

 
 
 
 
Forfeited
(43
)
 
37.14

 
 
 
 
Outstanding at March 31, 2018
3,674

 
$
34.45

 
7.3
 
$
37,607

Exercisable at March 31, 2018
1,474

 
$
25.36

 
5.3
 
$
26,596

Vested and expected to vest at March 31, 2018 and thereafter
3,456

 
$
33.94

 
7.2
 
$
36,818

The weighted-average fair value per share of options granted during the three months ended March 31, 2018 and 2017 was $14.22 and $10.86, respectively. The intrinsic value of options exercised during the three months ended March 31, 2018 and 2017 was $2.0 million and $2.9 million, respectively.
As of March 31, 2018, total unrecognized compensation cost related to unvested stock options was $23.1 million, which is expected to be recognized over a weighted-average vesting period of 3.0 years.
Employee Stock Purchase Plan activity
For the three months ending March 31, 2018 and 2017, employees purchased approximately 289,000 and 259,000 shares of common stock under the ESPP at weighted average prices of $26.30 and $25.51, respectively. As of March 31, 2018, the unrecognized compensation cost related to the shares to be purchased under the ESPP was approximately $6.5 million and is expected to be recognized over a weighted-average period of 1.4 years.
Restricted Stock Units and Restricted Stock Awards
Summaries of restricted stock activity under the Company's 2009 Equity Incentive Plan, as amended (the "2009 Plan") are presented below:    

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Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
Weighted-Average
Remaining Years
 
Aggregate
Intrinsic Value
 
(In thousands, except per share data)
Restricted Stock Units ("RSUs")
 
 
 
 
 
 
 
Outstanding at December 31, 2017
501

 
$
38.90

 
1.5
 
$
24,293

Granted
71

 
44.32

 
 
 
 
Vested
(50
)
 
33.70

 
 
 
 
Forfeited
(14
)
 
39.05

 
 
 
 
Outstanding and unvested at March 31, 2018
508

 
$
40.16

 
1.5
 
$
22,041

The weighted-average grant date fair value per share of RSUs granted during the three months ended March 31, 2018 and March 31, 2017 was $44.32 and $36.57, respectively.
As of March 31, 2018, total unrecognized compensation expense related to RSUs was $17.2 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.8 years.
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
(In thousands, except per share data)
Restricted Stock Awards ("RSAs")
 
 
 
Outstanding at December 31, 2017
23

 
$
41.07

Granted

 

Vested

 

Forfeited

 

Outstanding and unvested at March 31, 2018
23

 
$
41.08

As of March 31, 2018, total unrecognized compensation cost related to RSAs was $0.1 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.1 years.
Performance-based Restricted Stock Units
A summary of the performance-based restricted stock activity under the 2009 Plan during the three months ended March 31, 2018 is presented below:
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value Per Unit
 
(In thousands, except per share data)
Performance-based Restricted Stock Units ("PSUs")
 
 
 
Outstanding at December 31, 2017
225

 
$
31.18

Granted
110

 
38.03

Vested
(32
)
 
32.37

Forfeited
(1
)
 
43.20

Outstanding and unvested at March 31, 2018
302

 
$
33.51

The weighted-average grant date fair value per share of PSUs granted during the three months ended March 31, 2018 and 2017 was $38.03 and $32.37, respectively. As of March 31, 2018, total unrecognized compensation cost related to PSUs was $5.4 million, which is expected to be recognized over the remaining weighted-average period of 1.5 years.
Summary of Shares Reserved for Future Issuance under Equity Incentive Plans
The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of March 31, 2018:

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Number of Shares
 
(In thousands)
Share options outstanding
3,674

Non-vested restricted share awards
833

Shares authorized for future issuance
730

ESPP shares available for future issuance
2,077

Total shares reserved for future issuance
7,314

Stock Repurchase Program
On August 2, 2016, the Company's Board of Directors (the "Board") authorized a stock repurchase program providing for the repurchase of up to $50.0 million of the Company’s common stock (the “2016 Repurchase Program”). The 2016 Repurchase Program is in addition to the stock repurchase program approved by the Board on November 4, 2014 (the “2014 Repurchase Program”). As of March 31, 2018, the maximum dollar value of shares that may yet be purchased under the two repurchase programs was $54.9 million. The stock repurchase programs do not obligate the Company to repurchase any specific number of shares, and the Company may terminate or suspend the repurchase program at any time.
During the three months ended March 31, 2018 and 2017, the Company did not repurchase any of its outstanding common stock.
Note 13. Equity Offerings
On November 3, 2017, the Company entered into a Distribution Agreement (the “Distribution Agreement”) with J.P. Morgan Securities LLC, Wells Fargo Securities, LLC and HSBC Securities (USA) Inc., as its sales agents, pursuant to which the Company may offer and sell from time to time through the sales agents up to $125 million maximum aggregate offering price of the Company’s common stock. Sales of the common stock pursuant to the Distribution Agreement may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended (the "Securities Act"), including sales made directly on the Nasdaq Stock Market, or sales made to or through a market maker other than on an exchange.
For the three months ended March 31, 2018, the Company did not sell any of its common stock under the Distribution Agreement.
Note 14. Segment and Geographical Information
The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company's segments using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs that are not specific to either of the reportable segments and are managed separately at the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses. The two operating segments, which are the same as the Company's two reportable segments, are as follows:
Automation and Analytics
The Automation and Analytics segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems, pharmacy inventory management systems, and related software. The Automation and Analytics products are designed to enable the Company's customers to enhance and improve the effectiveness of the medication-use process, the efficiency of the medical-surgical supply chain, overall patient care and clinical and financial outcomes of medical facilities. Through modular configuration and upgrades, the Company's systems can be tailored to specific customer needs. The financial results of InPharmics acquired in the second quarter of 2017 are included in the Automation and Analytics segment.
Medication Adherence
The Medication Adherence segment includes solutions to assist patients to remain adherent to their medication regimens. These solutions are comprised of a variety of tools and aids that may be directly used by a pharmacist or a healthcare provider in their direct care for a patient, or the patient themselves, and include software based systems and medication adherence packaging. Software solutions primarily operate on the Patient Management Access Portal (PMAP), a subscription based software system which provides an environment for patient engagement by clinicians. Services running on PMAP

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include Time My Meds® medication synchronization, immunization management, and a number of tools used by clinicians to manage patient engagement workflows. Medication Adherence packaging is designed either for patient use in care environments where there is a caregiver present or for environments where the patient cares for him or herself and includes the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services.
The following tables summarize the financial performance of the Company's reportable segments, including a reconciliation of income from segment operations to income from total operations:
 
Three months ended March 31,
 
2018
 
2017
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Revenues
$
151,406

 
$
31,213

 
$
182,619

 
$
122,170

 
$
26,383

 
$
148,553

Cost of revenues
78,242

 
21,922

 
100,164

 
68,761

 
17,601

 
86,362

Gross profit
73,164

 
9,291

 
82,455

 
53,409

 
8,782

 
62,191

Operating expenses
48,390

 
10,199

 
58,589

 
48,062

 
11,196

 
59,258

Income from operations
$
24,774

 
$
(908
)
 
$
23,866

 
$
5,347

 
$
(2,414
)
 
$
2,933

Corporate costs
 
 
 
 
23,233

 
 
 
 
 
19,485

Income from operations
 
 
 
 
$
633

 
 
 
 
 
$
(16,552
)
 
 
 
 
 
 
 
 
 
 
 
 
Significant customers
There were no customers that accounted for more than 10% of our total revenues for the three months ended March 31, 2018 and 2017. Also, there were no customers that accounted for more than 10% of our accounts receivable as of March 31, 2018 and December 31, 2017.
Geographical Information
Revenues
 
Three months ended March 31,
 
2018
 
2017
 
(In thousands)
United States
$
158,202

 
$
130,279

Rest of world (1)
24,417

 
18,274

Total revenues
$
182,619

 
$
148,553

 
 
 
 
_________________________________________________
(1)    No individual country represented more than 10% of the respective totals.
      Property and equipment, net
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
United States
$
40,116

 
$
34,899

Rest of world (1)
8,174

 
7,696

Total property and equipment, net
$
48,290

 
$
42,595

_________________________________________________
(1)    No individual country represented more than 10% of the respective totals.

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Property and equipment, net is attributed to the geographic location in which it is located.
Note 15. Restructuring Expenses
On March 2, 2018, the Company initiated the realignment of its Automation and Analytics commercial group in North American and France. The total estimated cost for the plan was $1.5 million and consists primarily of employee severance cost. As of March 31, 2018, the unpaid balance is $1.4 million and is presented as a component of accrued compensation liabilities in the Condensed Consolidated Balance Sheet. 
On February 15, 2017, the Company announced its plan to reduce its workforce by approximately 100 full-time employees and close the Company’s Nashville, Tennessee and Slovenia facilities. The plan was completed in fiscal year 2017. During the three months ended March 31, 2017, the Company accrued $3.8 million of expenses, primarily for employee severance and related expenses, and paid out $2.1 million. The remaining unpaid balance of $1.7 million accrued expenses is presented as a component of accrued compensation in the Condensed Consolidated Balance Sheet. There were no facility-related costs incurred during the three months ended March 31, 2017.
Note 16. Subsequent Event
On April 30, 2018, the Company entered into a settlement agreement related to certain contingencies associated with the Ateb 2016 acquisition. The settlement, which will be recognized in the second quarter of 2018, is for approximately $2.5 million.     
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains forward-looking statements. The forward-looking statements are contained principally 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 product 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 ability to acquire companies, businesses, products or technologies on commercially reasonable terms and integrate such acquisitions effectively;
our continued investment in, and ability to deliver on, our key business strategies of developing differentiated solutions, increasing penetration of new markets, and expanding our solutions through acquisitions and partnerships;
our ability to deliver on our goals of advancing our platform with new product introductions annually, producing solutions that support fully automated central pharmacy operations and helping to lead the digital healthcare transformation with solutions that meet customer needs;
our belief that continued investment in our key business strategies will continue to generate our revenue and earnings growth, as well as our expectations about the trends and other factors we believe will be critical to the success of our strategies;
the bookings, revenue and margin opportunity presented by new products, emerging markets and international markets;
our ability to align our cost structure and headcount with our current business expectations;
the operating margins or earnings per share goals we may set;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
our expected future uses of cash and the sufficiency of our sources of funding;
the expected impacts of new accounting standards or changes to existing accounting standards;
the impacts of the U.S. Tax Cuts and Jobs Act of 2017; and
our ability to generate cash from operations and our estimates regarding the sufficiency of our cash resources.
In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "seeks," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and variations of these terms and similar expressions. Forward-looking statements are based on our current expectations and

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assumptions and are subject to known and unknown risks and uncertainties, 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, particularly in Part II - Item 1A. “Risk Factors” below. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. You should carefully read this quarterly report and the documents that we reference in this quarterly report and have filed as exhibits, as well as other documents we file from time to time with the Securities and Exchange Commission, with the understanding that our actual future results may be materially different from what we expect. All references in this report 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. The forward-looking statements in this quarterly report represent our estimates and assumptions only as of the date of this quarterly report. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those expressed or implied in any forward-looking statements, even if new information becomes available in the future.
We own various trademarks and service marks used in our business, including the following registered and unregistered marks which appear in this report: Omnicell®, the Omnicell logo, SureMed®, Ateb®, Time My Meds®, Aesynt®, AcuDose-Rx®, Connect-Rx®, MACH4®, Anesthesia WorkstationTM and Performance CenterTM. This report also includes the trademarks and service marks of other companies. All other trademarks and service marks used in this report are the marks of their respective holders.
OVERVIEW
Our Business
We are a leading provider of comprehensive automation and business analytics software solutions for patient-centric medication and supply management across the entire healthcare continuum, from the acute care hospital setting to post-acute skilled nursing and long-term care facilities to the home.
Operating Segments
We manage our business as two operating segments, Automation and Analytics and Medication Adherence.
Automation and Analytics. The Automation and Analytics segment is organized around the design, manufacturing, selling, and servicing of medication and supply dispensing systems, pharmacy inventory management systems, and related software. Our Automation and Analytics products are designed to enable our customers to enhance and improve the effectiveness of the medication-use process, the efficiency of the medical-surgical supply chain, overall patient care and clinical and financial outcomes of medical facilities. Through modular configuration and upgrades, our systems can be tailored to specific customer needs.
Medication Adherence. The Medication Adherence segment primarily includes the development, manufacturing and selling of solutions to assist patients to remain adherent to their medication regimens. These solutions are comprised of a variety of tools and aids that may be directly used by a pharmacist or a healthcare provider in their direct care for a patient, or the patient themselves, and include software based systems and medication adherence packaging, packaging equipment and ancillary products and services. These products are used to manage medication administration outside of the hospital setting and include medication adherence products sold under the brand names MTS, SureMed, Ateb, and Omnicell.
For further description of our operating segments, please refer to Note 14, Segment and Geographical Information, of the Notes to the Condensed Consolidated Financial Statements in this quarterly report.
We sell our product and consumable solutions together with related service offerings. Revenue generated in the United States represented 87% and 88% of our total revenues for the three months ended March 31, 2018 and 2017, respectively. We have not sold in the past, and have no future plans to sell our products either directly or indirectly, to customers located in countries that are identified as state sponsors of terrorism by the U.S. Department of State, and are subject to economic sanctions and export controls.
Strategy
The healthcare market is experiencing a period of substantive change. The adoption of electronic healthcare records, new regulatory constraints, and changes in the reimbursement structure have caused healthcare institutions to re-examine their operating structures, re-prioritize their investments, and seek efficiencies. We believe our customers’ evolving operating

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environment creates challenges for any supplier, but also affords opportunities for suppliers that are able to partner with customers to help them meet the changing demands. We have, and intend to continue to, invest in the strategies which we believe have generated and will continue to generate our revenue and earnings growth, while supporting our customers’ initiatives and needs. These strategies include:
Development of a differentiated platform. We invest in the development of products that we believe bring patient safety and workflow efficiency to our customers’ operations that they cannot get from other competing solutions. These differentiators may be as small as how a transaction operates or information provided on a report or as large as the entire automation of a workflow that would otherwise be completed manually. We intend to continue our focus on differentiating our products, and we carefully assess our investments regularly as we strive to ensure those investments provide the solutions most valuable to our customers.
Deliver our solutions to new markets. Areas of healthcare where work is done manually may benefit from our existing solutions. These areas include hospitals that continue to employ manual operations, healthcare segments of the U.S. market outside hospitals and markets outside the United States. We weigh the cost of entering these new markets against the expected benefits and focus on the markets that we believe are most likely to adopt our products.
Expansion of our solutions through acquisitions and partnerships. Our acquisitions have generally been focused on automation of manual workflows or data analytics, which is the enhancement of data for our customers’ decision-making processes. We believe that expansion of our product lines through acquisitions and partnerships to meet our customers changing and evolving expectations is a key component to our historical and future success.
Our investments have been consistent with the strategies outlined above. To differentiate our solutions from others available in the market, in December 2016 we announced the XT Series, our new generation of medication and supply automation that is fully integrated on our Unity enterprise platform. The XT Series includes automated medication and supply dispensing cabinets, the Anesthesia Workstation, and Controlled Substance Manager. The XT Automated Medication Cabinets have been integrated with Connect-Rx® from Aesynt, so customers in the United States and Canada who use AcuDose-Rx® cabinets can take advantage of the new hardware without changing their software or server infrastructure. As part of this product introduction, we developed a new hardware and electronics architecture for the XT Series. The new design enables more medications to be stocked within the same footprint-the XT cabinets offer up to 50% more capacity compared with similar units on the market. In November 2017, we introduced our new IVX Workflow Solution. This new solution powered by IVX Cloud services helps enable pharmacies to safely and efficiently compound and prepare IV treatments. In December 2017, we announced our XR2 Central Pharmacy Automated System, allowing customers to more fully automate their central pharmacies.
Consistent with our strategy to enter new markets, we have made investments in our selling, general and administrative expenses to expand our sales team and market to new customers. Our international efforts have focused primarily on two markets: Western Europe, where we sell solutions through a direct sales team in the United Kingdom, France, and Germany and through resellers in other markets; and in the Middle Eastern countries of the Arabian Peninsula. We have also expanded our sales efforts to medication adherence customers in the United States which has allowed us to sell our automated dispensing solutions and other products to this market.
Expansion of our solutions through acquisitions and partnerships include our acquisition of Aesynt in January 2016, our acquisition of Ateb in December 2016, and most recently, our acquisition of InPharmics in April 2017. Aesynt is a provider of automated medication management systems, including dispensing robots with storage solutions, medication storage and dispensing carts and cabinets, I.V. sterile preparation robotics and software, including software related to medication management. Ateb is a provider of pharmacy-based patient care solutions and medication synchronization to independent and chain retail pharmacies. InPharmics is a provider of advanced pharmacy informatics solutions to hospital pharmacies. We have also developed relationships with major providers of hospital information management systems with the goal of enhancing the interoperability of our products with their systems. We believe that enhanced interoperability will help reduce implementation costs, time, and maintenance for shared clients, while providing new clinical workflows designed to enhance efficiency and patient safety.
We believe that the success of our three leg strategy of differentiated products, expansion into new markets and acquisition and partnership in future periods, will be based on, among other factors:
Our expectation that the overall market demand for healthcare services will increase as the population grows, life expectancies continue to increase and the quality and availability of healthcare services increases;

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Our expectation that the environment of increased patient safety awareness, increased regulatory control, increased demand for innovative products that improve the care experience and increased need for workflow efficiency through the adoption of technology in the healthcare industry will make our solutions a priority in the capital budgets of healthcare facilities; and
Our belief that healthcare customers will continue to value a consultative customer experience from their suppliers.
Among other financial measures, we utilize product bookings to assess the current success of our strategies. Product bookings consist of all firm orders, as evidenced generally by a non-cancellable contract and purchase order for equipment and software, and by a purchase order for consumables. Equipment and software bookings are generally installable within twelve months and, other than subscription based sales, generally recorded as revenue upon customer acceptance of the installation. Consumables are recorded as revenue upon shipment to a customer or receipt by the customer, depending upon contract terms. Consumable bookings are generally recorded as revenue within one month.
In addition to product solution sales, we provide services to our customers. We provide installation planning and consulting as part of every product sale which is included in the initial price of the solution. 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, our service revenues have also grown.
The growth in the Medication Adherence revenue was primarily driven by further market penetration and adoption of our automated and semi-automated packaging equipment within the United States and Europe, Middle East and Africa ("EMEA"), as well as modest price increases across the product lines.
In the future, we expect our strategies to evolve as the business environment of our customers evolves, but for our focus to remain on improving healthcare with solutions that help change the practices in ways that improve patient and provider outcomes. We expect our investment in differentiated products, new markets, and acquisitions and partnerships to continue.
In fiscal year 2017, we created Centers of Excellence (“COE”) for product development, engineering and manufacturing, with the Point of Use COE located at our facilities in California, the Robotics and Central Pharmacy COE located at our facilities near Pittsburgh, Pennsylvania, and the Medication Adherence Consumables COE located at our facilities in St. Petersburg, Florida. As part of this initiative, we reduced our workforce in the first half of 2017 by approximately 100 full-time employees, or about 4% of the total headcount, and closed our Nashville, Tennessee and Slovenia facilities.
Our full-time headcount was approximately 2,370 and 2,350 on March 31, 2018 on December 31, 2017, respectively.
2017 Acquisitions
On April 12, 2017, we completed the acquisition of InPharmics, a technology and services company that provides advanced pharmacy informatics solutions to hospital pharmacies. The purchase price consideration was $5.0 million, net of cash acquired of $0.3 million. The results of InPharmics' operations have been included in our consolidated results of operations beginning April 13, 2017, and presented as part of the Automation and Analytics segment.     
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 United States Generally Accepted Accounting Principles ("U.S. GAAP"). The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions. We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements:
Revenue recognition;
Allowance for doubtful accounts and notes receivable from investment in sales-type leases;
Inventory;
Software development costs;

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Business combinations;
Valuation and impairment of goodwill, intangible assets and other long-lived assets;
Goodwill and acquired intangible assets
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 three months ended March 31, 2018 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, 2017, except as discussed in "Recently adopted authoritative guidance" in Note 1 to the Condensed Consolidated Financial Statements in this quarterly report.
Recently issued authoritative guidance
Refer to Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements in this quarterly report for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial position and cash flows.
RESULTS OF OPERATIONS
Total Revenues
 
Three months ended March 31,
 
 
 
 
 
Change in
 
2018
 
2017
 
$
 
%
 
(Dollars in thousands)
Product revenues
$
130,104

 
$
98,702

 
$
31,402

 
32
%
Percentage of total revenues
71
%
 
66
%
 
 
 
 
Service and other revenues
52,515

 
49,851

 
2,664

 
5
%
Percentage of total revenues
29
%
 
34
%
 
 
 
 
Total revenues
$
182,619

 
$
148,553

 
$
34,066

 
23
%
Product revenues represented 71% and 66% of total revenues for the three months ended March 31, 2018 and March 31, 2017, respectively. Product revenues increased by $31.4 million due to increased sales for the Medication Adherence segment of $5.5 million and increased sales for the Automation and Analytics segment of $25.9 million. The increase in the Automation and Analytics segment was attributed to an increase in sales of XT series products of $24.0 million as the sales for the three months period ended March 31, 2017 had a slower conversion of bookings and backlog into revenue due to the introduction of the new XT series of products in the fourth quarter of 2016. The remainder of the increase in the Automation and Analytics segment was attributed to an increase in sales from IV solutions and Performance Center. The increase in the Medication Adherence segment was primarily attributed to higher completed installations of our VBM products compared to the three months ended March 31, 2017.
Service and other revenues represented 29% and 34% of total revenues for the three months ended March 31, 2018 and March 31, 2017, respectively. Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues increased by $2.7 million primarily due to an increase from our Automation and Analytics segment of $3.3 million attributed to an increase in our installed customer base.
Our international sales represented 13% and 12% of total revenues for the three months ended March 31, 2018 and 2017, respectively, and are expected to be affected by foreign currency exchange rates fluctuations. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates.
Our ability to continue to grow revenue 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, and our flexibility in manpower 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.
 
 
 
 
 
 
 
 
Financial Information by Segment

28


Revenues
 
Three months ended March 31,
 
 
 
 
 
Change in
 
2018
 
2017
 
$
 
%
Revenues:
(Dollars in thousands)
Automation and Analytics
$
151,406

 
$
122,170

 
$
29,236

 
24
%
Percentage of total revenues
83
%
 
82
%
 
 
 
 
Medication Adherence
31,213

 
26,383

 
4,830

 
18
%
Percentage of total revenues
17
%
 
18
%
 
 
 
 
Total revenues
$
182,619

 
$
148,553

 
$
34,066

 
23
%
The $29.2 million increase in Automation and Analytics revenues for the three months ended March 31, 2018 in comparison to the three months ended March 31, 2017 was due to an increase in product revenue of $25.9 million and an increase in service revenues of $3.3 million. The increase in product revenue in the Automation and Analytics segment was attributed to an increase in sales of XT series products of $24.0 million as the sales for the three months period ended March 31, 2017 had a slower conversion of bookings and backlog into revenue due to the introduction of the new XT series of products in the fourth quarter of 2016. The remainder of the increase in product revenue in the Automation and Analytics segment was attributed to increases in sales from IV solutions and Performance Center. The service revenue increase of $3.3 million was primarily attributed to an increase in our installed customer base.
Medication Adherence revenues increased by $4.8 million for the three months ended March 31, 2018 in comparison to the three months ended March 31, 2017. The increase in revenue was due to an increase in product revenue of $5.5 million, offset by a decrease in service revenue of $0.6 million. The product revenue increase of $5.5 million was attributed primarily to higher completed installations of our VBM products compared to the three months ended March 31, 2017.
 
 
 
 
 
 
 
 
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) installation costs as we install our equipment at the customer site and include costs of the field installation personnel, including labor, travel expense, and other expenses; and (iii) other costs, including variances in standard costs and overhead, scrap costs, rework, warranty, provisions for excess and obsolete inventory and amortization of software development costs and intangibles.
 
Three months ended March 31,
 
 
 
 
 
Change in
 
2018
 
2017
 
$
 
%
Cost of revenues:
(Dollars in thousands)
Automation and Analytics
$
78,242

 
$
68,761

 
$
9,481

 
14
%
As a percentage of related revenues
52
%
 
56
%
 
 
 
 
Medication Adherence
21,922

 
17,601

 
4,321

 
25
%
As a percentage of related revenues
70
%
 
67
%
 
 
 
 
Total cost of revenues
$
100,164

 
$
86,362

 
$
13,802

 
16
%
As a percentage of total revenues
55
%
 
58
%
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Automation and Analytics
$
73,164

 
$
53,409

 
$
19,755

 
37
%
Automation and Analytics gross margin
48
%
 
44
%
 
 
 
 
Medication Adherence
9,291

 
8,782

 
509

 
6
%
Medication Adherence gross margin
30
%
 
33
%
 
 
 
 
Total gross profit
$
82,455

 
$
62,191

 
$
20,264

 
33
%
Total gross margin
45
%
 
42
%
 
 
 
 

29


 
 
 
 
 
 
 
 
Cost of Revenues. Cost of revenues for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 increased by $13.8 million, of which $9.5 million was attributed to the increase of cost of revenue in our Automation and Analytics segment and $4.3 million was attributed to the increase of cost of revenue in our Medication Adherence segment. The increase of the cost of revenue in the Automation and Analytics is consistent with the increase of revenue of $29.2 million in the Automation and Analytics for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase of the cost of revenue in the Medication Adherence segment is consistent with the increase of revenue of $4.8 million in the Medication Adherence segment for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Overall changes to gross margin primarily relate to product mix from sales for the periods presented.
Operating Expenses and Income (Loss) from Operations
 
Three months ended March 31,
 
 
 
 
 
Change in
 
2018
 
2017
 
$
 
%
Operating expenses:
(Dollars in thousands)
Research and development
$
16,537

 
$
16,803

 
$
(266
)
 
(2
)%
As a percentage of total revenues
9
 %
 
11
 %
 
 
 
 
Selling, general and administrative
65,285

 
61,940

 
3,345

 
5
 %
As a percentage of total revenues
36
 %
 
42
 %
 
 
 
 
Total operating expenses
$
81,822

 
$
78,743

 
$
3,079

 
4
 %
As a percentage of total revenues
45
 %
 
53
 %
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from operations:
 
 
 
 
 
 
 
Automation and Analytics
$
24,774

 
$
5,347

 
$
19,427

 
363
 %
Operating margin
16
 %
 
4
 %
 
 
 
 
Medication Adherence
(908
)
 
(2,414
)
 
1,506

 
(62
)%
Operating margin
(3
)%
 
(9
)%
 
 
 
 
Corporate Expenses
23,233

 
19,485

 
3,748

 
19
 %
Total income (loss) from operations
$
633

 
$
(16,552
)
 
$
17,185

 
(104
)%
Total operating margin
 %
 
(11
)%
 
 
 
 
Research and Development. The $0.3 million decrease in research and development expenses for the three months ended March 31, 2018 compared to three months ended March 31, 2017 was primarily driven by a decrease in research and development expenses of $1.1 million in our Automation and Analytics segment, offset by an increase of $0.6 million in our Medication Adherence segment. The decrease in the Automation and Analytics segment is primarily attributed to a one-time restructuring expense of $0.8 million included in the three months ended March 31, 2017. The increase in the Medication Adherence segment is attributed to continued investments in product development.
Selling, General and Administrative. The $3.3 million increase in selling, general and administrative expenses for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 was primarily due to the increase in corporate-related expenses of $3.6 million as a result of an increase in employee-related expenses due to the increase in headcount.
 
 
 
 
 
 
 
 
    Provision for (Benefit from) Income Taxes
 
Three months ended
 
 
 
 
 
Change in
 
March 31,
2018
 
March 31,
2017
 
$
 
%
 
(Dollars in thousands)
Provision for (benefit from) income taxes
$
(4,816
)
 
$
(8,673
)
 
$
3,857

 
(44
)%
Effective tax rate on earnings
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

30


Our annual effective tax rate before discrete items was 18.3% and 39.1% for the three months ended March 31, 2018 and 2017, respectively. The decrease in the estimated annual effective tax rate for the three months ended March 31, 2018 compared to the same period in 2017 was primarily due to U.S. tax reform legislation that reduced the statutory corporate income tax rate from 35% to 21%, increase in Federal Research & Development credits and company jurisdictional restructuring.
LIQUIDITY AND CAPITAL RESOURCES
We had cash and cash equivalents of $43.8 million at March 31, 2018 compared to $32.4 million at December 31, 2017. All of our cash and cash equivalents are invested in demand deposits only.
Our cash position and working capital at March 31, 2018 and December 31, 2017 were as follows:
 
March 31,
2018
 
December 31,
2017
 
(In thousands)
Cash
43,773

 
32,424

Working Capital
$
150,804

 
$
147,066

All of our cash and cash equivalents for these periods were invested in bank demand deposits. Our ratio of current assets to current liabilities was 1.7:1 at March 31, 2018 and 1.7:1 at December 31, 2017.
Sources of Cash
Credit Agreement
On January 5, 2016, we entered into a $400 million secured credit facility pursuant to a credit agreement, by and among us, the lenders from time to time party thereto, Wells Fargo Securities, LLC, as sole lead arranger and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”). The Credit Agreement provides for a $200 million term loan facility (the “Term Loan Facility”), and prior to the amendment discussed below, a $200 million revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Facilities”). In addition, the Credit Agreement includes a letter of credit sub-limit of up to $10 million and a swing line loan sub-limit of up to $10 million.
On December 26, 2017 and April 11, 2017, we entered into the amendments to the Credit Agreement. Under these amendments, the Revolving Credit Facility was increased from $200 million to $315 million and certain other modifications were made. Refer to Note 8, Debt, of the Notes to the Condensed Consolidated Financial Statements included in this quarterly report. We expect to use future loans under the Revolving Credit Facility, if any, for general corporate purposes, including acquisitions.
As of March 31, 2018, the outstanding balance from the Facilities was $214.5 million and we were in compliance with all covenants.
Distribution Agreement
On November 3, 2017, we entered into a Distribution Agreement (the “Distribution Agreement”) with J.P. Morgan Securities LLC, Wells Fargo Securities, LLC and HSBC Securities (USA) Inc., as our sales agents (collectively, the “Sales Agents”), pursuant to which we may offer and sell from time to time through the Sales Agents up to $125 million maximum aggregate offering price of our common stock. Sales of the common stock pursuant to the Distribution Agreement may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act, including sales made directly on the Nasdaq Stock Market, or sales made to or through a market maker other than on an exchange. We intend to use the net proceeds from the sale, if any, of common stock in the offering for general corporate purposes, which may include, without limitation, the acquisition of complementary businesses, the repayment of outstanding indebtedness, capital expenditures and working capital.
For the three months ended March 31, 2018, we did not sell any common stock under the Distribution Agreement.
Uses of Cash
Our future uses of cash are expected to be primarily for working capital, capital expenditures, loan principal and interest payments, and other contractual obligations. We also expect a continued use of cash for potential acquisitions and acquisition assessment activities.

31

Table of Contents

Our stock repurchase programs have a total of $54.9 million remaining for future repurchases as of March 31, 2018, which may result in additional use of cash. See "Stock Repurchase Program" under Note 12. Employee Benefits and Share-Based Compensation, of the Notes to Condensed Consolidated Financial Statements included in this quarterly report. There were no stock repurchases during the three months ended March 31, 2018 and 2017.
Based on our current business plan and revenue 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, along with the availability of funds under the Facilities 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:
 
Three months ended
 
March 31,
2018
 
March 31,
2017
 
(In thousands)
Net cash provided by (used in):
 
 
 
Operating activities
$
18,856

 
$
28,182

Investing activities
(14,540
)
 
(6,837
)
Financing activities
5,741

 
(30,136
)
Effect of exchange rate changes on cash and cash equivalents
1,292

 
651

Net increase (decrease) in cash and cash equivalents
$
11,349

 
$
(8,140
)
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 $18.9 million for the three months ended March 31, 2018, primarily as a result of the net income of $2.7 million adjusted for non-cash items and changes in assets and liabilities. The non-cash items primarily consisted of depreciation and amortization expense of $12.3 million, and share-based compensation expense of $6.5 million, deferred income taxes of $5.1 million and $0.6 million of amortization of debt financing fees. The net cash outflow which was contributed to changes in assets and liabilities include (i) an increase in accounts receivable and unbilled receivable, net of $0.6 million due to the increase in unbilled receivable balances offset by an increase in collections, (ii) an increase in inventories of $6.9 million for inventory buildup in support of forecasted sales, (iii) a decrease in accounts payable of $9.4 million primarily due to the timing of payments, (iv) an increase in the investment in sales-type leases of $1.5 million, (v) an increase in other current assets of $1.0 million, (iv) an increase in other long-term assets of $1.7 million. These outflows were offset by an increase in deferred revenue of $15.1 million due to the timing of orders and revenue being recognized for installed product, an increase in other accrued liabilities of $4.3 million, a decrease in prepaid expenses of $0.8 million, and an increase in accrued compensation of $2.4 million.
Net cash provided by operating activities was $28.2 million for the three months ended March 31, 2017, primarily as a result of the net loss of $10.3 million adjusted for non-cash items and changes in assets and liabilities. The non-cash items primarily consisted of depreciation and amortization expense of $12.4 million, share-based compensation expense of $5.5 million, deferred income taxes of $8.8 million and $0.4 million of amortization of debt financing fees. The cash inflow attributed to changes in assets and liabilities includes (i) a decrease in accounts receivable of $21.6 million due to timing of collections, (ii) an increase in accrued compensation of $2.0 million, as a result of the restructuring plan, (iii) an increase in deferred revenue of $8.5 million due to timing of orders and revenue being recognized on installed product, (iv) a decrease in net investment in sales-type leases of $1.1 million, and (v) an increase in accounts payable of $11.1 million primarily due to the timing of payments. These inflows were partially offset by an increase in inventories of $6.9 million for inventory buildup in support of forecasted sales, particularly for the XT series and an increase in other long-term assets of $9.4 million.