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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                
Commission File No. 000-33043
OMNICELL, INC.
(Exact name of registrant as specified in its charter)
Delaware
94-3166458
(State or other jurisdiction of
incorporation or organization)
(IRS Employer
Identification No.)
590 East Middlefield Road
Mountain View, CA 94043
(Address of registrant’s principal executive offices, including zip code)

(650251-6100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
 
Ticker Symbol
Common Stock, $0.001 par value
 
NASDAQ Global Select Market
 
OMCL
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
 
 
 
 
 
 
 
              If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitions period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes     No ý
As of July 26, 2019, there were 41,655,702 shares of the registrant’s common stock, $0.001 par value, outstanding.
 


Table of Contents

OMNICELL, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
June 30,
2019
 
December 31,
2018
 
(In thousands, except par value)
ASSETS
Current assets:
 
 
 
Cash and cash equivalents
$
87,482

 
$
67,192

Accounts receivable and unbilled receivables, net of allowances of $3,698 and $2,582, respectively
205,353

 
196,238

Inventories
103,906

 
100,868

Prepaid expenses
19,679

 
20,700

Other current assets
13,419

 
12,136

Total current assets
429,839

 
397,134

Property and equipment, net
52,847

 
51,500

Long-term investment in sales-type leases, net
21,041

 
17,082

Operating lease right-of-use assets
61,482

 

Goodwill
335,699

 
335,887

Intangible assets, net
134,101

 
143,686

Long-term deferred tax assets
31,195

 
15,197

Prepaid commissions
44,607

 
46,143

Other long-term assets
86,167

 
74,613

Total assets
$
1,196,978

 
$
1,081,242

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 
 
 
Accounts payable
$
40,183

 
$
38,038

Accrued compensation
33,619

 
41,660

Accrued liabilities
54,570

 
43,047

Deferred revenues, net
83,012

 
81,835

Total current liabilities
211,384

 
204,580

Long-term deferred revenues
9,658

 
10,582

Long-term deferred tax liabilities
61,292

 
41,484

Long-term operating lease liabilities
55,237

 

Other long-term liabilities
9,603

 
9,562

Long-term debt, net
76,562

 
135,417

Total liabilities
423,736

 
401,625

Commitments and contingencies (Note 11)


 


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; 50,784 and 49,480 shares issued; 41,639 and 40,335 shares outstanding, respectively
51

 
50

Treasury stock at cost, 9,145 shares outstanding, respectively
(185,074
)
 
(185,074
)
Additional paid-in capital
753,127

 
678,041

Retained earnings
216,714

 
197,454

Accumulated other comprehensive loss
(11,576
)
 
(10,854
)
Total stockholders’ equity
773,242

 
679,617

Total liabilities and stockholders’ equity
$
1,196,978

 
$
1,081,242

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 June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Product revenues
$
158,379

 
$
134,636

 
$
303,989

 
$
265,295

Services and other revenues
59,034

 
54,037

 
115,941

 
105,997

Total revenues
217,413

 
188,673

 
419,930

 
371,292

Cost of revenues:
 
 
 
 
 
 
 
Cost of product revenues
84,583

 
75,076

 
163,394

 
150,493

Cost of services and other revenues
28,785

 
24,814

 
55,374

 
49,561

Total cost of revenues
113,368

 
99,890

 
218,768

 
200,054

Gross profit
104,045

 
88,783

 
201,162

 
171,238

Operating expenses:
 
 
 
 
 
 
 
Research and development
16,848

 
15,512

 
32,926

 
32,049

Selling, general, and administrative
68,434

 
65,937

 
136,712

 
131,222

Total operating expenses
85,282

 
81,449

 
169,638

 
163,271

Income from operations
18,763

 
7,334

 
31,524

 
7,967

Interest and other income (expense), net
(1,629
)
 
(896
)
 
(3,039
)
 
(3,625
)
Income before provision for income taxes
17,134

 
6,438

 
28,485

 
4,342

Provision for (benefit from) income taxes
1,158

 
(150
)
 
9,225

 
(4,966
)
Net income
$
15,976

 
$
6,588

 
$
19,260

 
$
9,308

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.39

 
$
0.17

 
$
0.47

 
$
0.24

Diluted
$
0.37

 
$
0.16

 
$
0.45

 
$
0.23

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
41,371

 
38,970

 
41,033

 
38,804

Diluted
42,945

 
40,000

 
42,646

 
39,854

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 (UNAUDITED)
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net income
$
15,976

 
$
6,588

 
$
19,260

 
$
9,308

Other comprehensive loss, net of reclassification adjustments and taxes:
 
 
 
 
 
 
 
Unrealized gains (losses) on interest rate swap contracts
(103
)
 
(90
)
 
(420
)
 
112

Foreign currency translation adjustments
(971
)
 
(4,414
)
 
(302
)
 
(1,942
)
Other comprehensive loss
(1,074
)
 
(4,504
)
 
(722
)
 
(1,830
)
Comprehensive income
$
14,902

 
$
2,084

 
$
18,538

 
$
7,478

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

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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-In
Capital
 
Accumulated
Earnings
 
Accumulated Other
Comprehensive Income (Loss)
 
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
(In thousands)
Balances as of December 31, 2018
49,480

 
$
50

 
(9,145
)
 
$
(185,074
)
 
$
678,041

 
$
197,454

 
$
(10,854
)
 
$
679,617

Net income

 

 

 

 

 
3,284

 

 
3,284

Other comprehensive income

 

 

 

 

 

 
352

 
352

At the market equity offering, net of costs
243

 

 

 

 
20,216

 

 

 
20,216

Share-based compensation

 

 

 

 
8,410

 

 

 
8,410

Issuance of common stock under employee stock plans
628

 

 

 

 
20,526

 

 

 
20,526

Tax payments related to restricted stock units

 

 

 

 
(1,920
)
 

 

 
(1,920
)
Balances as of March 31, 2019
50,351

 
$
50

 
(9,145
)
 
$
(185,074
)
 
$
725,273

 
$
200,738

 
$
(10,502
)
 
$
730,485

Net income

 

 

 

 

 
15,976

 

 
15,976

Other comprehensive loss

 

 

 

 

 

 
(1,074
)
 
(1,074
)
At the market equity offering, net of costs
217

 

 

 

 
17,590

 

 

 
17,590

Share-based compensation

 

 

 

 
8,260

 

 

 
8,260

Issuance of common stock under employee stock plans
216

 
1

 

 

 
4,806

 

 

 
4,807

Tax payments related to restricted stock units

 

 

 

 
(2,802
)
 

 

 
(2,802
)
Balances as of June 30, 2019
50,784

 
$
51

 
(9,145
)
 
$
(185,074
)
 
$
753,127

 
$
216,714

 
$
(11,576
)
 
$
773,242

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

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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
 
Common Stock
 
Treasury Stock
 
Additional
Paid-In
Capital
 
Accumulated
Earnings
 
Accumulated Other
Comprehensive Income (Loss)
 
Stockholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
(In thousands)
Balances as of December 31, 2017
47,577

 
$
48

 
(9,145
)
 
$
(185,074
)
 
$
585,755

 
$
159,725

 
$
(6,113
)
 
$
554,341

Net income

 

 

 

 

 
2,720

 

 
2,720

Other comprehensive income

 

 

 

 

 

 
2,674

 
2,674

Share-based compensation

 

 

 

 
6,528

 

 

 
6,528

Issuance of common stock under employee stock plans
428

 

 

 

 
9,541

 

 

 
9,541

Tax payments related to restricted stock units

 

 

 

 
(1,300
)
 

 

 
(1,300
)
Balances as of March 31, 2018
48,005

 
$
48

 
(9,145
)
 
$
(185,074
)
 
$
600,524

 
$
162,445

 
$
(3,439
)
 
$
574,504

Net income

 

 

 

 

 
6,588

 

 
6,588

Other comprehensive loss

 

 

 

 

 

 
(4,504
)
 
(4,504
)
Share-based compensation

 

 

 

 
7,238

 

 

 
7,238

Issuance of common stock under employee stock plans
341

 

 

 

 
6,576

 

 

 
6,576

Tax payments related to restricted stock units

 

 

 

 
(1,762
)
 

 

 
(1,762
)
Balances as of June 30, 2018
48,346

 
$
48

 
(9,145
)
 
$
(185,074
)
 
$
612,576

 
$
169,033

 
$
(7,943
)
 
$
588,640

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)
 
Six months ended June 30,
 
2019
 
2018
 
(In thousands)
Operating Activities
 
 
 
Net income
$
19,260

 
$
9,308

Adjustments to reconcile net income to net cash provided by operating activities
 
 
 
Depreciation and amortization
25,874

 
24,829

Loss on disposal of property and equipment
399

 

Share-based compensation expense
16,670

 
13,766

Deferred income taxes
3,810

 
(6,655
)
Amortization of operating lease right-of-use assets
5,226

 

Amortization of debt financing fees
1,145

 
1,145

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and unbilled receivables
(9,244
)
 
15,476

Inventories
(4,466
)
 
(9,789
)
Prepaid expenses
1,021

 
2,126

Other current assets
(830
)
 
(2,283
)
Investment in sales-type leases
(4,412
)
 
(1,838
)
Prepaid commissions
1,536

 
2,812

Other long-term assets
3,061

 
(2,797
)
Accounts payable
2,066

 
(12,229
)
Accrued compensation
(8,041
)
 
3,927

Accrued liabilities
1,810

 
(2,574
)
Deferred revenues
253

 
5,336

Operating lease liabilities
(5,269
)
 

Other long-term liabilities
3,891

 
167

Net cash provided by operating activities
53,760

 
40,727

Investing Activities
 
 
 
Software development for external use
(22,581
)
 
(13,091
)
Purchases of property and equipment
(9,369
)
 
(14,985
)
Net cash used in investing activities
(31,950
)
 
(28,076
)
Financing Activities
 
 
 
Repayment of debt and revolving credit facility
(60,000
)
 
(12,500
)
At the market offering, net of offering costs
37,806

 

Proceeds from stock issuances under stock-based compensation plans
25,333

 
16,117

Employees’ taxes paid related to restricted stock units
(4,722
)
 
(3,062
)
Net cash (used in) provided by financing activities
(1,583
)
 
555

Effect of exchange rate changes on cash and cash equivalents
63

 
538

Net increase in cash and cash equivalents
20,290

 
13,744

Cash and cash equivalents at beginning of period
67,192

 
32,424

Cash and cash equivalents at end of period
$
87,482

 
$
46,168

Supplemental disclosure of non-cash activities
 
 
 
Unpaid purchases of property and equipment
$
711

 
$
892

Transfers between inventory and property and equipment, net
$
1,428

 
$
2,194

Right-of-use assets obtained in exchange for new operating lease liabilities
$
557

 
$

 
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 medication and supply dispensing automation solutions, central pharmacy automation solutions, analytics software, 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 June 30, 2019 and December 31, 2018, the results of operations and comprehensive income for the three and six months ended June 30, 2019 and 2018, and cash flows for the six months ended June 30, 2019 and 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with United States Generally Accepted Accounting Principles (“U.S. 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, 2018 filed with the SEC on February 27, 2019, except as discussed in the sections entitled “Lessor Leases”, “Lessee Leases”, and “Recently Adopted Authoritative Guidance” below. The Company’s results of operations and comprehensive income for the three and six months ended June 30, 2019 and cash flows for the six months ended June 30, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019, or for any future period.
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.
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 using information about its revenues, gross profit, income from operations, and other key financial data. The Company previously operated and reported its business in two segments: Automation and Analytics, and Medication Adherence. In the fourth quarter of 2018, the Company introduced its vision of the Autonomous Pharmacy, a more fully automated and digitized system of medication management, in order to address changes in the healthcare industry as the Company executes on its plan to deliver end-to-end solutions with greater emphasis on automating manual processes for its customers. These industry changes include the continuing consolidation of healthcare systems, rising pharmaceutical costs, and increased scrutiny on controlled substances. In an effort to deliver on its strategic vision, the Company initiated a company-wide organizational realignment in the fourth quarter of 2018 to centrally manage its business operations, including the development and marketing of all of the Company’s products, sales and distribution, supply chain and inventory management, as well as regulatory and quality functions. As a result of this organizational realignment, all significant operating decisions are based upon an analysis of the Company as one operating segment. Therefore, effective January 1, 2019, the Company started reporting as only one operating segment, which is the same as the reporting segment. Accordingly, prior period information has been revised to conform with current period presentation.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. 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;

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operating lease right-of-use assets and liabilities; inventory valuation; capitalized software development costs; impairment of goodwill; purchased intangibles and long-lived assets; share-based compensation; and accounting for income taxes.
Lessor Leases
The Company determines if an arrangement is a lease at inception. The transaction price is allocated to separate performance obligations, generally consisting of hardware and software products, installation, and post-installation technical support, proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price the Company charges for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, the Company’s products and services are not generally sold separately. The Company uses an amount discounted from the list price as a best estimated selling price.
Sales-Type Leases
The Company enters into non-cancelable sales-type lease arrangements, most of which do not have an option to extend the lease term. At the end of the lease term, the customer must either return the equipment or negotiate a new agreement, resulting in a new purchase or lease transaction. Failure of the customer to either return the equipment or negotiate a new agreement results in the contract becoming a month-to-month rental. Certain sales-type leases automatically renew for successive one year periods at the end of each lease term with written notice from the customer. The Company’s sales-type lease agreements do not contain any material residual value guarantees.
For sales-type leases, the Company recognizes revenues for its hardware and software products, net of lease execution costs, post-installation product maintenance, and technical support, at the net present value of the lease payment stream upon customer acceptance. The Company recognizes service revenues associated with the sales-type leases ratably over the term of the agreement in service revenues on the Condensed Consolidated Statements of Operations. The Company recognizes interest income from sales-type leases using the effective interest method. Both hardware and software revenues, and interest income from sales-types leases are recorded in product revenues on the Condensed Consolidated Statements of Operations.
The Company optimizes cash flows by selling a majority of its non-U.S. government sales-type leases to third-party leasing finance companies on a non-recourse basis. The Company has no obligation to the leasing company once the lease has been sold. Some of the Company's sales-type leases, mostly those relating to U.S. government hospitals which comprise approximately 50% of the lease receivable balance, are retained in-house.
Operating Leases
The Company entered into certain leasing agreements that were classified as operating leases prior to the adoption of the new lease accounting standard. Those agreements in place prior to January 1, 2019 will continue to be treated as operating leases, however any new leasing agreements entered into on or after January 1, 2019 under these programs are classified and accounted for as sales-type leases in accordance with the new lease accounting standard. The operating lease arrangements entered into prior to January 1, 2019 are non-cancelable, and most automatically renew for successive one year periods at the end of each lease term absent written notice from the customer. The Company’s operating lease agreements do not contain any material residual value guarantees.
For operating leases, rental income is generally recognized on a straight-line basis over the term of the associated lease, and recorded in services and other revenues in the Condensed Consolidated Statements of Operations. Leased assets under operating leases are carried at amortized cost net of accumulated depreciation in property and equipment, net on the Condensed Consolidated Balance Sheets. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the associated lease, and recorded in cost of revenues in the Condensed Consolidated Statements of Operations.
Lessee Leases
The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our lease contracts do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of the lease payments.
Many of the Company’s operating leases include an option to extend the lease. The specific terms and conditions of the extension options vary from lease to lease, but are consistent with standard industry practices in each area that the Company operates. The Company reviews each of its lease options at a time required by the terms of the lease contract, and notifies the lessor if it chooses to exercise the lease renewal option. Until the Company is reasonably certain that it will extend the lease contract, the renewal option periods will not be recognized as right-of-use assets or lease liabilities.

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Certain leases include provisions for early termination, which allows the contract parties to terminate their obligations under the lease contract. The terms and conditions of the termination options vary by contract. When the Company has made a decision to exercise an early termination option, the right-of-use assets and associated lease liabilities are remeasured in accordance with the present value of the remaining cash flows under the lease contract.
Certain building lease agreements include rental payments subject to change annually based on fluctuations in various indexes (i.e. Consumer Price Index (“CPI”), Retail Price Index, and other international indexes). Certain data center lease agreements include rental payments subject to change based on usage and CPI fluctuations. The changes based on usage and indexes are treated as variable lease costs and recognized in the period in which the obligation for those payments was incurred. 
The Company’s operating lease agreements do not contain any material residual value guarantees, restrictions, or restriction covenants.
Recently Adopted Authoritative Guidance
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The FASB amended lease accounting requirements to begin recording assets and liabilities arising from most leases on the balance sheet. The new guidance also requires significant additional disclosures about the amount and timing of cash flows from leases. The Company adopted this new guidance on January 1, 2019. In July 2018, the FASB issued amendments in ASU 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. The Company has elected this transition approach as well as elected the package of practical expedients permitted under the transition guidance within the new standard, which will allow the Company to carry forward the historical lease classification of contracts entered into prior to January 1, 2019. As a result of electing the package of practical expedients described above, existing leases and related initial direct costs have not been reassessed prior to the effective date, and therefore, adoption of the lease standard did not have an impact on the Company’s previously reported consolidated statements.
The Company also elected the following practical expedients: (i) combining lease and non-lease components, (ii) leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheets, and the associated lease payments are recognized in the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term, and (iii) applying discount rates to operating leases using a portfolio approach.
From a lessor perspective, certain agreements that were previously classified as operating leases are classified as sales-type leases under the new lease accounting standard. The agreements in place prior to the adoption of the new lease accounting standard on January 1, 2019 will continue to be treated as operating leases.
The Company’s adoption of the new standard impacted the Condensed Consolidated Balance Sheets at the beginning of the period of adoption as follows:
 
January 1, 2019
 
Pre-ASC 842 Balances
 
ASC 842 Adoption Impact
 
Post-ASC 842 Balances
 
(In thousands)
Operating lease right-of-use assets
$

 
$
66,008

 
$
66,008

Accrued liabilities (1)
43,047

 
10,067

 
53,114

Long-term operating lease liabilities

 
59,791

 
59,791

Other long-term liabilities (2)
9,562

 
(3,850
)
 
5,712

_________________________________________________
(1) 
Adjustment represents the current portion of the operating lease liabilities of $10.3 million, and reclassification of exit cost obligations and deferred rent of $0.1 million and $0.1 million, respectively, to reduce the operating lease right-of-use assets.
(2) 
Adjustment represents the reclassification of deferred rent to reduce the operating lease right-of-use assets.
Adoption of the standard did not have an impact on the Company’s stockholders’ equity, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows as of January 1, 2019.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits the reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. These amounts are commonly referred to as “stranded tax effects.” ASU 2018-02 is effective for the Company beginning January 1, 2019. The adoption of

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this guidance did not have a material effect on the Company’s consolidated financial statements and therefore no adjustment to retained earnings was made.
Recently Issued Authoritative Guidance
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, that modifies or replaces existing models for trade and other receivables, debt securities, loans, and certain other financial instruments. For instruments measured at amortized cost, including trade and lease receivables, loans and held-to-maturity debt securities, the standard will replace the current “incurred loss” approach with an “expected loss” model. Entities will be required to estimate expected credit losses over the life of the instrument, considering available relevant information about the collectibility of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. ASU 2016-13 will be effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact ASU 2016-13 will have on its consolidated financial statements.
There was no other recently issued and effective authoritative guidance that is expected to have a material impact on the Company’s Condensed Consolidated Financial Statements through the reporting date.
Note 2. Revenues
Revenue Recognition
The Company earns revenues from sales of its medication and supply dispensing automation systems, along with consumables and related services, which are sold in the healthcare industry, its principal market. The Company’s customer arrangements typically include one or more of the following performance obligations:
Products. Software-enabled equipment that manages and regulates the storage and dispensing of pharmaceuticals, consumable blister cards and packaging equipment and other medical supplies.
Software. Additional software applications that enable incremental functionality of the Company’s equipment or services.
Installation. Installation of equipment as integrated systems at customer sites.
Post-installation technical support. Phone support, on-site service, parts, and access to unspecified software updates and enhancements, if and when available.
Professional services. Other customer services, such as training and consulting.
A portion of the Company’s sales are made to customers who are members of Group Purchasing Organizations (“GPOs”). GPOs are often owned fully or in part by the Company’s customers, and the Company pays fees to the GPO on completed contracts. The Company considers these fees consideration paid to customers and records them as reductions to revenue. Fees to GPOs were $2.6 million and $2.1 million for the three months ended June 30, 2019 and 2018, respectively, and $4.8 million and $4.0 million for the six months ended June 30, 2019 and 2018, respectively.

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Disaggregation of Revenues
The following table summarizes the Company’s product revenues disaggregated by revenue type for the three and six months ended June 30, 2019 and 2018:
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Hardware and software
$
135,022

 
$
112,031

 
$
255,243

 
$
219,482

Consumables
19,416

 
19,670

 
40,503

 
39,108

Other
3,941

 
2,935

 
8,243

 
6,705

Total product revenues
$
158,379

 
$
134,636

 
$
303,989

 
$
265,295


The following table summarizes the Company’s revenues disaggregated by geographic region, which is determined based on customer location, for the three and six months ended June 30, 2019 and 2018:
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
United States
$
195,811

 
$
163,645

 
$
375,831

 
$
321,847

Rest of world (1)
21,602

 
25,028

 
44,099

 
49,445

Total revenues
$
217,413

 
$
188,673

 
$
419,930

 
$
371,292

_________________________________________________
(1) 
No individual country represented more than 10% of the respective totals.
Contract Assets and Contract Liabilities
The following table reflects the Company’s contract assets and contract liabilities:
 
June 30,
2019
 
December 31,
2018
 
(In thousands)
Short-term unbilled receivables - included in accounts receivable and unbilled receivables
$
10,667

 
$
9,191

Long-term unbilled receivables - included in other long-term assets
13,630

 
16,481

Total contract assets
$
24,297

 
$
25,672

 
 
 
 
Short-term deferred revenues, net
$
83,012

 
$
81,835

Long-term deferred revenues
9,658

 
10,582

Total contract liabilities
$
92,670

 
$
92,417


The portion of the transaction price allocated to the Company’s unsatisfied performance obligations for which invoicing has occurred is recorded as deferred revenues.
Short-term deferred revenues of $83.0 million and $81.8 million include deferred revenues from product sales and service contracts, net of deferred cost of sales, of $12.0 million and $11.1 million as of June 30, 2019 and December 31, 2018, respectively. The short-term deferred revenues from product sales relate to delivered and invoiced products, pending installation and acceptance, expected to occur within the next twelve months. During the three and six months ended June 30, 2019, the Company recognized revenues of $25.7 million and $65.0 million that were included in the corresponding gross short-term deferred revenues balance of $92.9 million as of December 31, 2018.
Long-term deferred revenues include deferred revenues from service contracts of $9.7 million and $10.6 million as of June 30, 2019 and December 31, 2018, respectively. Remaining performance obligations primarily relate to maintenance contracts and are recognized ratably over the remaining term of the contract, generally not more than five years.

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Significant Customers
There were no customers that accounted for more than 10% of the Company’s total revenues for the three and six months ended June 30, 2019 and 2018. Also, there were no customers that accounted for more than 10% of the Company’s accounts receivable as of June 30, 2019 and December 31, 2018.
Note 3. Net Income Per Share
Basic net income per share is computed by dividing net income for the period by the weighted-average number of shares outstanding during the period. In periods of net loss, all potential common shares are anti-dilutive, so diluted net loss per share equals the basic net loss per share. In periods of net income, diluted net income per share is computed by dividing net income for the period by the basic weighted-average number of shares plus any dilutive potential common stock outstanding during the period. 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 per share calculations for the three and six months ended June 30, 2019 and 2018 were as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share data)
Net income
$
15,976

 
$
6,588

 
$
19,260

 
$
9,308

Weighted-average shares outstanding — basic
41,371

 
38,970

 
41,033

 
38,804

Effect of dilutive securities from stock award plans
1,574

 
1,030

 
1,613

 
1,050

Weighted-average shares outstanding — diluted
42,945

 
40,000

 
42,646

 
39,854

Net income per share - basic
$
0.39

 
$
0.17

 
$
0.47

 
$
0.24

Net income per share - diluted
$
0.37

 
$
0.16

 
$
0.45

 
$
0.23

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average shares related to stock award plans
741

 
1,264

 
748

 
1,249


Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $87.5 million and $67.2 million as of June 30, 2019 and December 31, 2018, respectively, consisted of bank accounts with major financial institutions.
Fair Value Hierarchy
The Company measures its financial instruments at fair value. The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy as they are valued primarily using quoted market prices utilizing market observable inputs. The Company’s interest rate swap contracts 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 December 31, 2018:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Interest rate swap contracts
$

 
$
562

 
$

 
$
562

Total financial assets
$

 
$
562

 
$

 
$
562


The Company’s interest rate swap agreement matured during the second quarter of 2019.
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

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Company’s interest rate swaps, which are designated as cash flow hedges, involve the receipt of variable amounts from counterparties in exchange for the Company making fixed-rate payments over the life of the agreements. The Company does not hold or issue any derivative financial instruments for speculative trading purposes.
During 2016, the Company entered into an interest rate swap agreement with a combined notional amount of $100.0 million with one counterparty that became effective on June 30, 2016 and matured on April 30, 2019. The swap agreement required the Company to pay a fixed rate of 0.8% and provided that the Company 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 were net settled with the respective counterparty on the last business day of each month, commencing July 31, 2016.
The fair value of the interest rate swap agreement at December 31, 2018 was $0.6 million. There were no amounts reclassified into current earnings due to ineffectiveness during the periods presented.
Note 5. Balance Sheet Components
Balance sheet details as of June 30, 2019 and December 31, 2018 are presented in the tables below:
 
June 30,
2019
 
December 31,
2018
 
(In thousands)
Inventories:
 
 
 
Raw materials
$
34,867

 
$
32,511

Work in process
7,867

 
8,726

Finished goods
61,172

 
59,631

Total inventories
$
103,906

 
$
100,868

 
 
 
 
Other long-term assets:
 
 
 
Capitalized software, net
$
71,434

 
$
56,819

Unbilled receivables
13,630

 
16,481

Other assets
1,103

 
1,313

Total other long-term assets, net
$
86,167

 
$
74,613

 
 
 
 
Accrued liabilities:
 
 
 
Operating lease liabilities, current portion
$
10,286

 
$

Advance payments from customers
6,494

 
8,993

Rebates and lease buyouts
13,031

 
11,076

Group purchasing organization fees
4,668

 
4,455

Taxes payable
4,038

 
5,885

Other accrued liabilities
16,053

 
12,638

Total accrued liabilities
$
54,570

 
$
43,047



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The following tables summarize the changes in accumulated balances of other comprehensive income (loss) for the three and six months ended June 30, 2019 and 2018:
 
Three months ended June 30,
 
2019
 
2018
 
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
$
(10,605
)
 
$
103

 
$
(10,502
)
 
$
(4,482
)
 
$
1,043

 
$
(3,439
)
Other comprehensive income (loss) before reclassifications
(971
)
 
48

 
(923
)
 
(4,414
)
 
195

 
(4,219
)
Amounts reclassified from other comprehensive income (loss), net of tax

 
(151
)
 
(151
)
 

 
(285
)
 
(285
)
Net current-period other comprehensive income (loss), net of tax
(971
)
 
(103
)
 
(1,074
)
 
(4,414
)
 
(90
)
 
(4,504
)
Ending balance
$
(11,576
)
 
$

 
$
(11,576
)
 
$
(8,896
)
 
$
953

 
$
(7,943
)

 
Six months ended June 30,
 
2019
 
2018
 
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
$
(11,274
)
 
$
420

 
$
(10,854
)
 
$
(6,954
)
 
$
841

 
$
(6,113
)
Other comprehensive income (loss) before reclassifications
(302
)
 
148

 
(154
)
 
(1,942
)
 
596

 
(1,346
)
Amounts reclassified from other comprehensive income (loss), net of tax

 
(568
)
 
(568
)
 

 
(484
)
 
(484
)
Net current-period other comprehensive income (loss), net of tax
(302
)
 
(420
)
 
(722
)
 
(1,942
)
 
112

 
(1,830
)
Ending balance
$
(11,576
)
 
$

 
$
(11,576
)
 
$
(8,896
)
 
$
953

 
$
(7,943
)

Note 6. Property and Equipment
The following table represents the property and equipment balances as of June 30, 2019 and December 31, 2018:
 
June 30,
2019
 
December 31,
2018
 
(In thousands)
Equipment
$
77,676

 
$
75,417

Furniture and fixtures
8,441