Omnicell, Inc.
OMNICELL, Inc (Form: 10-Q, Received: 05/05/2017 16:14:19)
Table of Contents

 
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, 2017
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 27, 2017 , there were 37,163,574 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. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
March 31,
2017
 
December 31,
2016
 
 
(In thousands, except par value)
 
 
ASSETS
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
46,348

 
$
54,488

 
Accounts receivable, net of allowances of $4,416 and $4,796, respectively
131,433

 
150,303

 
Inventories
76,230

 
69,297

 
Prepaid expenses
27,775

 
28,646

 
Other current assets
12,593

 
12,674

 
Total current assets
294,379

 
315,408

 
Property and equipment, net
40,996

 
42,011

 
Long-term investment in sales-type leases, net
19,174

 
20,585

 
Goodwill
328,216

 
327,724

 
Intangible assets, net
184,127

 
190,283

 
Long-term deferred tax assets
5,624

 
4,041

 
Other long-term assets
37,247

 
35,051

 
Total assets
$
909,763

 
$
935,103

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
 
 
 
 
Accounts payable
$
38,466

 
$
27,069

 
Accrued compensation
28,677

 
26,722

 
Accrued liabilities
31,406

 
31,195

 
Long-term debt, current portion, net
8,410

 
8,410

 
Deferred revenue, net
90,521

 
87,516

 
Total current liabilities
197,480

 
180,912

 
Long-term deferred revenue
15,994

 
17,051

 
Long-term deferred tax liabilities
42,502

 
51,592

 
Other long-term liabilities
8,716

 
8,210

 
Long-term debt, net
206,128

 
245,731

 
Total liabilities
470,820

 
503,496

 
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; 46,272 and 45,778 shares issued; 37,127 and 36,633 shares outstanding, respectively
46

 
46

 
Treasury stock at cost, 9,145 shares outstanding
(185,074
)
 
(185,074
)
 
Additional paid-in capital
541,159

 
525,758

 
Retained earnings
91,226

 
100,396

 
Accumulated other comprehensive loss
(8,414
)
 
(9,519
)
 
Total stockholders’ equity
438,943

 
431,607

 
Total liabilities and stockholders’ equity
$
909,763

 
$
935,103

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

3

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three months ended March 31,
 
2017
 
2016
 
(In thousands, except per share data)
Revenues:
 
 
 
Product
$
98,930

 
$
127,895

Services and other revenues
51,624

 
43,109

Total revenues
150,554

 
171,004

Cost of revenues:
 
 
 
Cost of product revenues
63,588

 
71,918

Cost of services and other revenues
22,774

 
19,141

Total cost of revenues
86,362

 
91,059

Gross profit
64,192

 
79,945

Operating expenses:
 
 
 
Research and development
16,803

 
13,838

Selling, general and administrative
64,625

 
64,255

Total operating expenses
81,428

 
78,093

Income (loss) from operations
(17,236
)
 
1,852

Interest and other income (expense), net
(2,456
)
 
(2,171
)
Loss before provision for income taxes
(19,692
)
 
(319
)
Provision for (benefit from) income taxes
(8,938
)
 
59

Net loss
$
(10,754
)
 
$
(378
)
Net loss per share:
 
 
 
Basic and diluted
$
(0.29
)
 
$
(0.01
)
Weighted-average shares outstanding:
 
 
 
Basic and diluted
36,840

 
35,740

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


4

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
 
Three months ended March 31,
 
2017
 
2016
 
(In thousands)
Net loss
$
(10,754
)
 
$
(378
)
Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
   Unrealized gains on interest rate swap contracts
182

 

   Foreign currency translation adjustments
923

 
(327
)
Other comprehensive income (loss)
1,105

 
(327
)
Comprehensive loss
$
(9,649
)
 
$
(705
)
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


5

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Three months ended March 31,
 
2017
 
2016
 
(In thousands)
Operating Activities
 
 
 
Net loss
$
(10,754
)
 
$
(378
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
12,448

 
14,473

Loss on disposal of fixed assets

 
13

Share-based compensation expense
5,511

 
3,891

Income tax benefits from employee stock plans
11

 
164

Deferred income taxes
(9,091
)
 
(1,042
)
Amortization of debt financing fees
397

 
397

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
18,870

 
(1,070
)
Inventories
(6,933
)
 
(5,113
)
Prepaid expenses
871

 
1,983

Other current assets
372

 
324

Investment in sales-type leases
1,120

 
(8,928
)
Other long-term assets
(38
)
 
1,232

Accounts payable
11,104

 
1,568

Accrued compensation
1,955

 
4,114

Accrued liabilities
(115
)
 
417

Deferred revenue
1,948

 
12,663

Other long-term liabilities
506

 
(2,701
)
Net cash provided by operating activities
28,182

 
22,007

Investing Activities
 
 
 
Purchases of intangible assets, intellectual property and patents
(160
)
 
(1,074
)
Software development for external use
(4,225
)
 
(3,070
)
Purchases of property and equipment
(2,452
)
 
(4,261
)
Business acquisitions, net of cash acquired

 
(271,458
)
Net cash used in investing activities
(6,837
)
 
(279,863
)
Financing Activities
 
 
 
Proceeds from debt, net

 
247,059

Repayment of debt and revolving credit facility
(40,000
)
 
(20,000
)
Payment for contingent consideration

 
(3,000
)
Proceeds from issuances under stock-based compensation plans
10,916

 
5,149

Employees' taxes paid related to restricted stock units
(1,052
)
 
(382
)
Net cash provided by (used in) financing activities
(30,136
)
 
228,826

Effect of exchange rate changes on cash and cash equivalents
651

 
300

Net decrease in cash and cash equivalents
(8,140
)
 
(28,730
)
Cash and cash equivalents at beginning of period
54,488

 
82,217

Cash and cash equivalents at end of period
$
46,348

 
$
53,487

 
 
 
 
Supplemental disclosure of non-cash activities
 
 
 
Unpaid purchases of property and equipment
$
865

 
$
468

Effect of adoption of new accounting standard
$
1,582

 
$

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

6

Table of Contents

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. Our major products are automated medication, supply control systems and medication adherence solutions which are sold in our principal market, which is the healthcare industry. Our market is primarily located in the United States and Europe. "Omnicell" "our", "us", "we" 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, 2017 and December 31, 2016 , the results of its operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2017 and March 31, 2016 . 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, 2016 filed with the SEC on February 28, 2017. The Company's results of operations, comprehensive income (loss) and cash flows for the three months ended March 31, 2017 are not necessarily indicative of results that may be expected for the year ending December 31, 2017 , 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.
Certain prior year amounts have been reclassified to conform to the 2017 presentation. These reclassifications include: (i) provision for excess and obsolete inventories, and (ii) provision for the allowance for doubtful accounts have been reclassified/combined with inventories and accounts receivable within net cash provided by operating activities in the Consolidated Statements of Cash Flows. These changes are not material and do not impact previously disclosed net cash provided by operating activities, net cash used in investing activities, and net cash used by financing activities.
Additionally, see "Recently adopted authoritative guidance" for the effects of first quarter adoption of ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting .
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, 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 administrative expenses. See Note 13, Segment and Geographical Information, for additional information on segment reporting.

7


Recently adopted authoritative guidance
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provision of ASU No. 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted the standard effective January 1, 2017.  The impact of adoption was the recording of excess tax benefits within income tax expense, rather than in Additional Paid in Capital of $0.8 million for the three months ended March 31, 2017 . The recording of excess tax benefits within income tax expense rather than Additional Paid in Capital resulted in a $0.02 per share improvement in the net loss to $(0.29) per share. Additionally, the Company recognized the previously unrecognized excess tax benefits using the modified retrospective transition method, which resulted in a cumulative-effect adjustment of $1.6 million to retained earnings. The previously unrecognized excess tax effects were recorded as a deferred tax asset. The Company also elected to apply the change in presentation to the statements of cash flows retrospectively and no longer classifies the excess tax benefits from employee stock plans as a reduction from operating cash flows, resulting in an increase of $0.2 million in the net cash provided by operating activities and a decrease of $0.2 million in the net cash provided by financing activities for the three months ended March 31, 2016 . Additionally, on a prospective basis, the calculation of potential common shares for the dilutive earnings per share calculation (when profitable) no longer includes excess tax benefits under the Treasury buyback method, resulting in general in higher dilutive shares. Under ASU 2016-09, the Company made a policy election to continue with forfeiture estimation for expense calculation instead of the alternative of recognition only at forfeiture.
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , which simplifies the accounting for goodwill impairment for all entities by requiring impairment charges to be based on the first step in today’s two-step impairment test under ASC 350, “Intangibles-Goodwill and Other.” Under the new guidance, if a reporting unit’s carrying amount exceeds its fair value, an entity will record an impairment charge based on that difference. The impairment charge will be limited to the amount of goodwill allocated to that reporting unit. The standard eliminates the current ASC 350 requirement to calculate a goodwill impairment charge using Step 2. ASU 2017-14 is effective for annual and interim impairment tests performed in periods beginning after December 15, 2019. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017.  The Company adopted ASU 2017-04 effective January 1, 2017.  The adoption of this authoritative guidance did not have impact on the Company's Condensed Consolidated Financial Statements or related disclosures for the period presented.
In January 2017, the FASB issued ASU 2017-01, Business Combinations , which clarifies the definition of a business and provides a screen to determine when a set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-01 is effective for fiscal years beginning after December 15, 2017, with early adoption permitted.  The Company adopted ASU 2017-01 effective January 1, 2017.  The adoption of this authoritative guidance did not have impact on the Company's Condensed Consolidated Financial Statements or related disclosures for the period presented.
Recently issued authoritative guidance
In May 2014, the FASB issued ASU 2014-09-Revenue from Contracts with Customers, which outlines a single, comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of ASU 2014-09 is to recognize revenue when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, accordingly, it is possible more judgment and estimates may be required within the revenue recognition process than is required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The FASB has recently issued several amendments to ASU 2014-09, including clarification on accounting for licenses of intellectual property and identifying performance obligations. ASU 2014-09 will be effective for the Company beginning January 1, 2018.
The two permitted transition methods under ASU 2014-09 are the full retrospective method, in which case ASU 2014-09 would be applied to each prior reporting period presented and the cumulative effect of applying ASU 2014-09 would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying ASU 2014-09 would be recognized at the date of initial application. Currently, the Company is in the process of reviewing our historical contracts to quantify the impact on its consolidated financial statements. Depending on the results of the Company's review, there could be changes to the timing of revenue recognition and certain sales commission and related costs associated with obtaining and fulfilling its customer contracts. The Company will be required to capitalize and amortize

8


incremental costs related to obtaining customer contracts, such as sales commission costs. The Company is also in the process of assessing the appropriate changes to its business processes and upgrading its systems and controls to support recognition and disclosure under ASU 2014-09. The Company otherwise expects to complete its assessment process, including selecting a transition method for adoption, in the next two quarters of 2017.
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
On January 5, 2016, the Company completed the acquisition of all of the membership interests of Aesynt pursuant to the Aesynt Securities Purchase Agreement. 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. The total consideration was $271.5 million , net of cash on hand at signing of $8.2 million . The results of Aesynt's operations have been included in our consolidated results of operations as of the time of the acquisition, and presented as part of the Automation & Analytics segment.
On December 8, 2016, the Company completed its acquisition of ateb, Inc., and Ateb Canada Ltd. (together, “Ateb”) pursuant to Ateb's Securities Purchase Agreement for $40.7 million of cash consideration, net of $0.9 million cash acquired. The cash consideration, included the repayment of Ateb indebtedness and other adjustments provided for in the Ateb's Securities Purchase Agreement. Ateb is a provider of pharmacy-based patient care solutions and the medication synchronization solutions leader to independent and chain pharmacies. The results of Ateb's operations have been included in our consolidated results of operations as of the time of the acquisition, and presented as part of the Medication Adherence segment.
The Company accounted for the acquisitions of Aesynt and Ateb in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition dates, respectively.
The following table represents the allocation of the purchase price to the assets acquired and the liabilities assumed by the Company during each acquisition, respectively, reconciled to the purchase price transferred included in the Company's Consolidated Balance Sheet:
 
Aesynt
 
Ateb
(preliminary)
 
Total
 
(in thousands)
Cash
$
8,164

 
$
902

 
$
9,066

Accounts receivable
43,312

 
7,905

 
51,217

Inventory
19,021

 
225

 
19,246

Other current assets
3,787

 
1,239

 
5,026

      Total current assets
74,284

 
10,271

 
84,555

Property and equipment
10,389

 
2,447

 
12,836

Intangibles
123,700

 
12,500

 
136,200

Goodwill
163,599

 
20,832

 
184,431

Other non-current assets
968

 
1,009

 
1,977

      Total assets
372,940

 
47,059

 
419,999

Current liabilities
26,753

 
2,314

 
29,067

Deferred revenue
25,512

 
2,776

 
28,288

Non-current deferred tax liabilities
38,622

 

 
38,622

Other non-current liabilities
2,431

 
367

 
2,798

   Total liabilities
93,318

 
5,457

 
98,775

Total purchase price
$
279,622

 
$
41,602

 
$
321,224

Total purchase price, net of cash received
$
271,458

 
$
40,700

 
$
312,158


9


The $163.6 million of goodwill arising from the Aesynt acquisition is primarily attributed to sales of future products and services and Aesynt's assembled workforce. The goodwill has been assigned to the Automation & Analytics segment and is not deductible for tax purposes.
The $20.8 million of goodwill arising from the Ateb acquisition is primarily attributed to sales of future products and services and Ateb's assembled workforce.
Intangibles eligible for recognition separate from goodwill were those that satisfied either the contractual/legal criterion or the separability criterion in the accounting guidance. The identifiable intangible assets acquired and their estimated useful lives for amortization are as follows:
 
Aesynt
 
Ateb
 
Fair value
 
Weighted
average
useful life
 
Fair value
 
Weighted
average
useful life
 
(In thousands)
 
(In years)
 
(In thousands)
 
(In years)
Customer relationships
$
58,200

 
14-16
 
$
8,900

 
12
Developed technology
38,800

 
8
 
3,400

 
5
Backlog
20,200

 
1-3
 
 
In-process research and development  (1)
3,900

 
 
 
Non-compete
1,800

 
3
 
100

 
1
Trade names
800

 
1
 
100

 
1
Total purchased intangible assets
$
123,700

 
 
 
$
12,500

 
 
(1) The amortization of the in-process R&D assets begins when the in-process R&D projects are complete.
Aesynt Acquisition
Customer relationships represent the fair value of the underlying relationships and agreements with Aesynt’s customers, acquired developed technology represents the fair value of Aesynt products that have reached technological feasibility and were part of Aesynt’s product offerings at the date of acquisition, backlog represents the fair value of sales order backlog at the date of acquisition, non-compete intangible asset represents the fair value of non-compete agreements with former key members of Aesynt's management, and trade name represents the fair value of brand and name recognition associated with the marketing of Aesynt’s products and services. In-process research and development ("IPR&D") represents the fair value of incomplete Aesynt research and development projects that had not reached technological feasibility as of the date of acquisition. Incremental costs incurred for those projects are expensed as incurred in research and development.
The fair value of trade names, acquired developed technology, and acquired IPR&D was determined based on an income approach using the relief-from-royalty method at the royalty rates of 0.5% , 4% to 8% and 12.5% , respectively. The fair value of customer relationships, backlog, and non-compete intangible assets were determined based on an income approach using the discounted cash flow method, at the discounted rates of 13% , 10% and 13% , respectively. The intangible assets, except customer relationship and IPR&D, are being amortized over their estimated useful lives using the straight line method of amortization. The customer relationship intangible asset is being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained. In accordance with authoritative guidance, the IPR&D is accounted for as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. IPR&D is tested for impairment during the period it is considered an indefinite lived asset. IPR&D related projects are expected to be completed in two to three years. As of March 31, 2017 , none of the IPR&D projects have been completed, and they have progressed as previously estimated.
Ateb Acquisition
Customer relationships represent the fair value of the underlying relationships and agreements with Ateb’s customers expected to result in future sales, acquired developed technology represents the fair value of Ateb intellectual property incorporated in their products, non-compete intangible asset represents the fair value of non-compete agreements with former key members of Ateb's management, and trade name represents the fair value of brand and name recognition associated with the marketing of Ateb’s products and services.
The fair value of Ateb trade names and acquired developed technology was determined based on an income approach using the relief-from-royalty method at the royalty rates of 0.5% and 5% to 6% , respectively. The fair value of customer relationships, and non-compete intangible assets were determined based on an income approach using the discounted cash flow

10


method, both using a 15% discount rate. The intangible assets for non-compete agreements and trade name are being amortized over their estimated useful lives using the straight line method of amortization. The intangible assets for customer relationship and developed technology are being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained.
Note 3. Net Loss Per Share
Basic net loss per share is computed by dividing net 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 calculation of basic and diluted net loss per share for the three months ended March 31, 2017 and March 31, 2016 is as follows:
 
Three months ended March 31,
 
2017
 
2016
 
(In thousands, except per share data)
Net loss
$
(10,754
)
 
$
(378
)
Weighted-average shares outstanding — basic
36,840

 
35,740

Effect of dilutive securities from stock award plans

 

Weighted-average shares outstanding — diluted
36,840

 
35,740

Net loss per share - basic and diluted
$
(0.29
)
 
$
(0.01
)
 
 
 
 
Anti-dilutive weighted-average shares related to stock award plans
4,236

 
2,045

Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $46.3 million and $54.5 million as of March 31, 2017 and December 31, 2016 , respectively, consisted of demand deposits only.
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 foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. In accordance with the 2015 Avantec share purchase agreement, the Company agreed to make potential earn-out payments based on the achievement of bookings targets. Actual payments earned and paid were $3.0 million during the year ended 2016. We had $2.4 million of potential earn-out payments accrued as of March 31, 2017 . T he contingent consideration is at fair value and not subject to future accretion. The Company's contingent consideration liability is classified within Level 3, as valuation inputs which include the achievement of booking targets and the discount rate were unobservable in the market and significant to the instrument’s valuation.
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, 2017 :
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Interest rate swap contracts
$

 
$
1,427

 
$

 
$
1,427

Total financial assets
$

 
$
1,427

 
$

 
$
1,427

Contingent consideration liability
$

 
$

 
$
2,400

 
$
2,400

Total financial liabilities
$

 
$

 
$
2,400

 
$
2,400


11


There have been no transfers between fair value measurement levels during the three months ended March 31, 2017 and March 31, 2016 .
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, 2016 :
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Interest rate swap contracts

$

 
$
1,245

 
$

 
$
1,245

Total financial assets
$

 
$
1,245

 
$

 
$
1,245

Contingent consideration liability
$

 
$

 
$
2,400

 
$
2,400

Total financial liabilities
$

 
$

 
$
2,400

 
$
2,400

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.
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, 2017 and December 31, 2016 was $1.4 million and $1.2 million , respectively. 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 March 31, 2017 and December 31, 2016 are presented in the tables below:
 
March 31,
2017
 
December 31,
2016
 
(In thousands)
Inventories:
 
 
 
Raw materials
$
16,698

 
$
14,322

Work in process
8,114

 
7,800

Finished goods
51,418

 
47,175

Total inventories
$
76,230

 
$
69,297

 
 
 
 
Prepaid expense
 
 
 
Prepaid commissions
$
12,385

 
$
13,176

Other prepaid expenses
15,390

 
15,470

Total prepaid expense
$
27,775

 
$
28,646

 
 
 
 

12


 
March 31,
2017
 
December 31,
2016
Property and equipment:
 
 
 
Equipment
$
66,578

 
$
64,384

Furniture and fixtures
6,614

 
6,517

Leasehold improvements
9,791

 
9,778

Software
35,915

 
35,607

Construction in progress
7,625

 
7,211

Property and equipment, gross
126,523

 
123,497

Accumulated depreciation and amortization
(85,527
)
 
(81,486
)
Total property and equipment, net
$
40,996

 
$
42,011

 
 
 
 
Other long term assets:
 
 
 
Capitalized software, net
$
35,391

 
$
33,233

Other assets
1,856

 
1,818

Total other long term assets, net
$
37,247

 
$
35,051

 
 
 
 
Accrued liabilities:
 
 
 
Advance payments from customers
$
7,971

 
$
7,030

Rebates and lease buyouts
3,905

 
4,025

Group purchasing organization fees
3,549

 
3,737

Taxes payable
3,845

 
4,003

Other accrued liabilities
12,136

 
12,400

Total accrued liabilities
$
31,406

 
$
31,195


13


The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2017 and 2016 :
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
(In thousands)
December 31, 2016
$
(10,764
)
 
$
1,245

 
$
(9,519
)
     Other comprehensive income (loss) before reclassifications
923

 
176

 
1,099

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

 
6

 
6

     Net current-period other comprehensive income (loss), net of tax
923

 
182

 
1,105

March 31, 2017
$
(9,841
)
 
$
1,427

 
$
(8,414
)
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
(In thousands)

December 31, 2015
$
(2,730
)
 
$

 
$
(2,730
)
     Other comprehensive income (loss) before reclassifications
(327
)
 

 
(327
)
     Amounts reclassified from other comprehensive income (loss), net of tax

 

 

     Net current-period other comprehensive income (loss), net of tax
(327
)
 

 
(327
)
March 31, 2016
$
(3,057
)
 
$

 
$
(3,057
)

Note 6. Net Investment in Sales-Type Leases
On a recurring basis, we enter into sales-type lease transactions which vary 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, 2017 and December 31, 2016 :  
 
March 31,
2017
 
December 31,
2016
 
(In thousands)
Net minimum lease payments to be received
$
32,214

 
$
33,591

  Less: Unearned interest income portion
(2,506
)
 
(2,763
)
Net investment in sales-type leases
29,708

 
30,828

  Less: Short-term portion (1)
(10,534
)
 
(10,243
)
Long-term net investment in sales-type leases
$
19,174

 
$
20,585

(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 and $0.3 million as of March 31, 2017 and of December 31, 2016 , respectively.

14


At March 31, 2017 , the future minimum lease payments under sales-type leases are as follows:
 
March 31,
2017
 
(In thousands)
Remaining nine months of 2017
$
9,397

2018
7,988

2019
6,264

2020
4,139

2021
2,304

Thereafter
2,122

Total
$
32,214

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, 2016
$
215,082

 
$
112,642

 
$
327,724

  Foreign currency exchange rate fluctuations
342

 
150

 
492

Net balance as of March 31, 2017
$
215,424

 
$
112,792

 
$
328,216

Intangible assets, net
The carrying amounts of intangibles assets as of March 31, 2017 and December 31, 2016 are as follows:
 
March 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
$
132,579

 
$
(23,974
)
 
$
143

 
$
108,748

 
1 - 30
Acquired technology
73,409

 
(15,264
)
 
28

 
58,173

 
3 - 20
Backlog
20,533

 
(14,875
)
 

 
5,658

 
1 - 3
Trade names
8,607

 
(4,063
)
 
5

 
4,549

 
1 - 12
Patents
3,214

 
(1,273
)
 
41

 
1,982

 
2 - 20
Non-compete agreements
1,900

 
(783
)
 

 
1,117

 
3
In-process technology
3,900

 

 

 
3,900

 
Total intangibles assets, net
$
244,142

 
$
(60,232
)
 
$
217

 
$
184,127

 
 
 

15


 
December 31, 2016
 
Gross carrying
amount
 
Accumulated
amortization
 
 Foreign currency exchange rate fluctuations
 
Net
carrying
amount
 
Useful life
(years)
 
(In thousands, except for years)
Customer relationships
$
133,358

 
$
(20,930
)
 
$
(596
)
 
$
111,832

 
1 - 30
Acquired technology
73,599

 
(13,287
)
 
(159
)
 
60,153

 
3 - 20
Backlog
20,550

 
(14,083
)
 

 
6,467

 
1 - 3
Trade names
8,667

 
(3,887
)
 
(31
)
 
4,749

 
1 - 12
Patents
3,154

 
(1,264
)
 

 
1,890

 
2 - 20
Non-compete agreements

1,900

 
(608
)
 

 
1,292

 
3
In-process technology

3,900

 

 

 
3,900

 
Total intangibles assets, net
$
245,128

 
$
(54,059
)
 
$
(786
)
 
$
190,283

 
 
Amortization expense of intangible assets was $6.5 million and $9.2 million for the three months ended March 31, 2017 and 2016 , respectively.
The estimated future amortization expenses for amortizable intangible assets are as follows:
 
March 31, 2017
 
(In thousands)
Remaining nine months of 2017
$
18,591

2018
22,779

2019
17,354

2020
16,215

2021
14,861

Thereafter (excluding IPR&D)
90,427

Total
$
180,227

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 (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

16


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 January 5, 2016, the Company borrowed the full $200.0 million under the Term Loan Facility and $55.0 million under the Revolving Credit Facility to complete the Aesynt acquisition and pay related fees and expenses. On December 2, 2016, the Company borrowed an additional $40.0 million under the Revolver Credit Facility to complete the Ateb acquisition and pay related fees and expenses. As of March 31, 2017 the Company has repaid $74.5 million borrowed under these Facilities, which includes $40.0 million repaid during the three months ended March 31, 2017.
On April 11, 2017, the parties entered into the First Amendment to Credit Agreement and Collateral 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 .
In connection with these Facilities, the Company incurred $7.9 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 $1.5 million for the three months ended March 31, 2017 and 2016 . The Company was in full compliance with all covenants as of March 31, 2017 and December 31, 2016 .
The components of the Company’s debt obligations for the three months ended March 31, 2017 are as follows:
 
December 31, 2016
 
Borrowings
 
Repayment / Amortization
 
March 31, 2017
 
(In thousands)
Term loan facility
$
192,500

 
$

 
$
(2,500
)
 
$
190,000

Revolving credit facility
68,000

 

 
(37,500
)
 
30,500

   Total debt under the facilities
260,500

 

 
(40,000
)
 
220,500

   Less: Deferred issuance cost
(6,359
)
 

 
397

 
(5,962
)
   Total Debt, net of deferred issuance cost
$
254,141

 
$

 
$
(39,603
)
 
$
214,538

 Long term debt, current portion, net of deferred issuance cost
8,410

 
 
 
 
 
8,410

   Long term debt, net of deferred issuance cost
$
245,731

 
 
 
 
 
$
206,128

As of  March 31, 2017 , the carrying amount, net of deferred issuance cost, of $214.5 million  approximates the comparable fair value of $217.8 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.

17


Note 9. Deferred revenue
Short-term deferred revenue includes deferred revenue from product sales and service contracts, net of deferred cost of sales of $16.4 million and $14.2 million as of March 31, 2017 and December 31, 2016 , respectively. The short-term deferred revenues from product sales relate to the 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 $16.0 million and $17.1 million , as of March 31, 2017 and December 31, 2016 , 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, 2017 , the minimum future payments on non-cancelable operating leases were as follows:
 
(In thousands)
Remaining nine months of 2017
$
8,522

2018
11,389

2019
11,318

2020
7,375

2021
6,708

Thereafter
10,342

Total minimum future lease payments
$
55,654

 
Purchase obligations
In the ordinary course of business, the Company issues purchase orders based on its current manufacturing needs. At March 31, 2017 , the Company had non-cancelable purchase commitments of $55.6 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 any current legal proceedings 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.
The Company is not a party to any legal proceedings that management believes may have a material impact on the Company's financial position or results of operations.
Note 11. Income Taxes
The Company provides for income taxes for each interim period 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 39.1% and 37.0% for the three months ended March 31, 2017 and 2016 , respectively.
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 Federal Research & Development credit. Additionally, the Company adopted ASU 2019-16 effective January 1, 2017, as described in Note 1. The 2016 annual effective tax rate differed from the statutory rate of 35% primarily due to the favorable impact of the IRS settlement and release of tax reserves, the domestic production activities deduction, and a calculated benefit in state income taxes, offset by unfavorable items such as non-deductible transaction costs related to the Aesynt transaction, and non-deductible equity charges under ASC 740-718.

18


As of March 31, 2017 and December 31, 2016 , the Company had gross unrecognized tax benefits of $6.9 million and $6.5 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, 2017 and December 31, 2016 , the amount of accrued interest and penalties was $1.0 million and $0.7 million , respectively.
As of March 31, 2017 , calendar years 2011 and thereafter are open and subject to potential examination in one or more jurisdictions. However, our research credit carryforwards that may be used in future years are subject to adjustment, if and when utilized. As such our federal and California tax years remain open from 2015 and 1992, respectively.  During fiscal 2016, the Internal Revenue Service and the Company settled all outstanding items related to the audit of the Company's federal income tax returns for the fiscal years ended December 31, 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 Stock-Based Compensation, of its Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on February 28, 2017.    
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, 2017
 
March 31, 2016
 
(In thousands)
Cost of product and service revenues
$
982

 
$
549

Research and development
897

 
641

Selling, general and administrative
3,632

 
2,701

Total share-based compensation expense
$
5,511

 
$
3,891

The following weighted average assumptions are used to value stock options and Employee Stock Purchase Plan ("ESPP") shares issued pursuant to the Company's equity incentive plans for the three months ended March 31, 2017 and 2016 :
 
Three months ended
 
March 31, 2017
 
March 31, 2016
Stock Option Plans
 
 
 
Expected life, years
4.67

 
4.92

Expected volatility, %
31.1
%
 
32.6
%
Risk free interest rate, %
1.89
%
 
1.40
%
Estimated forfeiture rate %
7.7
%
 
8.6
%
Dividend yield, %
%
 
%
 
Three months ended
 
March 31, 2017
 
March 31, 2016
Employee Stock Purchase Plan
 
 
 
Expected life, years
0.5-2.0

 
0.5-2.0

  Expected volatility, %
25.8-32.8%

 
25.8-34.8%

  Risk free interest rate, %
0.52-1.31%

 
0.26-0.79%

  Dividend yield, %
%
 
%

19


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, 2017 :
 
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, 2016
3,214

 
$
26.06

 
7.3
 
$
26,331

Granted
363

 
36.67

 
 
 
 
Exercised
(188
)
 
22.86

 
 
 
 
Expired
(1
)
 
32.59

 
 
 
 
Forfeited
(38
)
 
31.72

 
 
 
 
Outstanding at March 31, 2017
3,350

 
$
27.33

 
7.4
 
$
44,631

Exercisable at March 31, 2017
1,493

 
$
20.88

 
5.5
 
$
29,519

Vested and expected to vest at March 31, 2017 and thereafter
3,168

 
$
26.96

 
7.3
 
$
43,388

The weighted-average fair value per share of options granted during the three months ended March 31, 2017 and 2016 was $10.86 and $8.51 , respectively. The intrinsic value of options exercised during the three months ended March 31, 2017 and 2016 was $2.9 million and $0.7 million , respectively.
As of March 31, 2017 , total unrecognized compensation cost related to unvested stock options was $15.4 million , which is expected to be recognized over a weighted-average vesting period of 3.0 years.
Restricted stock activity
The following table summarizes the restricted stock activity under the Company’s equity incentive plans during the three months ended March 31, 2017 :
 
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, 2016
505

 
$
31.42

 
1.6
 
$
17,135

Granted
74

 
36.57

 
 
 
 
Vested
(43
)
 
28.12

 
 
 
 
Forfeited
(9
)
 
31.97

 
 
 
 
Outstanding and unvested at March 31, 2017
527

 
$
32.39

 
1.5
 
$
21,418

The weighted-average grant date fair value per share of RSUs granted during the three months ended March 31, 2017 and March 31, 2016 was $36.57 and $27.77 , respectively.
As of March 31, 2017 , total unrecognized compensation expense related to RSUs was $14.0 million , which is expected to be recognized over the remaining weighted-average vesting period of 2.7 years.

20


 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
(In thousands, except per share data)
Restricted Stock Awards ("RSAs")
 
 
 
Outstanding at December 31, 2016
30

 
$
31.57

Granted

 


Vested

 


Forfeited

 


Outstanding and unvested at March 31, 2017
30

 
$
31.57

As of March 31, 2017 , 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 0.16 years .
Performance-based restricted stock unit activity
The following table summarizes the performance-based restricted stock activity under the Company’s equity incentive plans during the three months ended March 31, 2017 :
 
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, 2016
184

 
$
24.89

Granted
126

 
32.37

Vested
(31
)
 
24.66

Forfeited

 

Outstanding and unvested at March 31, 2017
279

 
$
28.29

The weighted-average grant date fair value per share of PSUs granted during the three months ended March 31, 2017 and 2016 was $32.37 and $24.66 , respectively. As of March 31, 2017 , total unrecognized compensation cost related to PSUs was $4.3 million , which is expected to be recognized over the remaining weighted-average period of 1.6 years.
Employee Stock Purchase Plan activity
For the three months ending March 31, 2017 and 2016, purchases under the ESPP were approximately 259,000 and 198,000 shares at weighted average prices of $25.51 and $22.74 , respectively. As of March 31, 2017 , the unrecognized compensation cost related to the shares to be purchased under the ESPP was approximately $2.9 million and is expected to be recognized over a weighted-average period of 1.1 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, 2017
 
Number of Shares
 
(In thousands)
Share options outstanding
3,350

Non-vested restricted share awards
836

Shares authorized for future issuance
2,411

ESPP shares available for future issuance
2,572

Total shares reserved for future issuance
9,169

Stock Repurchase Program

21


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, 2017 , the maximum dollar value of shares that may yet be purchased under the two repurchase programs was $54.9 million . The stock repurchase program does 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 and three months period ended March 31, 2017 and 2016 , the Company did not repurchase any of its outstanding common stock.
Note 13. 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.
Medication Adherence
The Medication Adherence segment includes primarily the manufacturing and selling of consumable medication blister cards, 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, which consist of proprietary medication packaging systems and related products for use by institutional pharmacies servicing long-term care, and correctional facilities or retail pharmacies serving patients in their local communities.
The following table summarizes 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, 2017
 
March 31, 2016
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total  
 
(In thousands)
Revenues
$
124,171

 
$
26,383

 
$
150,554

 
$
148,945

 
$
22,059

 
$
171,004

Cost of revenues
68,761

 
17,601

 
86,362

 
77,207

 
13,852

 
91,059

Gross profit
55,410

 
8,782

 
64,192

 
71,738

 
8,207

 
79,945

Operating expenses
50,747

 
11,196

 
61,943

 
52,205

 
5,611

 
57,816

Income (loss) from segment operations
$
4,663

 
$
(2,414
)
 
$
2,249

 
$
19,533

 
$
2,596

 
$
22,129

Corporate costs
 
 
 
 
19,485

 
 
 
 
 
20,277

Income (loss) from operations
 
 
 
 
$
(17,236
)
 
 
 
 
 
$
1,852

Significant customers
There were no customers that accounted for more than 10% of our total revenues for the three months ended March 31, 2017 and 2016 . Also, there were no customers that accounted for more than 10% of our accounts receivable as of March 31, 2017 and December 31, 2016 .

22


Geographical Information
Revenues
 
Three months ended
 
March 31,
2017
 
March 31,
2016
 
(In thousands)
United States
$
132,280

 
$
143,493

Rest of world (1)
18,274

 
27,511

Total revenues
$
150,554

 
$
171,004

_________________________________________________
(1)     No individual country represented more than 10% of the respective totals.
      Property and equipment, net
 
March 31,
2017
 
December 31,
2016
 
(In thousands)
United States
$
35,471

 
$
36,497

Rest of world (1)
5,525

 
5,514

Total property and equipment, net
$
40,996

 
$
42,011

_________________________________________________
(1)     No individual country represented more than 10% of the respective totals.
Property and equipment, net is attributed to the geographic location in which it is located.
Note 14. Restructuring Expenses
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 is expected to be completed in fiscal year 2017. The estimated total cost for the plan is $6.5 million , which includes estimated employee severance cost of approximately $3.9 million , and facility-related cost of approximately $2.6 million . 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 .

The following table summarizes the restructuring expense recorded in each reportable segment and income statement classification for the three months ended March 31, 2017 . There were no restructuring-related expenses recorded during the three months ended March 31, 2016 .
 
Automation and Analytics
 
Medication Adherence
 
Corporate
 
Total
 
(in thousands)
Cost of revenue
$
1,266

 
$
431

 
$

 
$
1,697

Research and development
1,006

 
62

 

 
1,068

Selling, general and administrative
480

 
103

 
417

 
1,000

Total
$
2,752

 
$
596

 
$
417

 
$
3,765

Note 15. Subsequent Event
On April 19, 2017, the Company announced the acquisition of Dixie Drawl, LLC d/b/a InPharmics ("InPharmics"), a Mississippi-based technology and services company that provides advanced pharmacy informatics solutions to hospital pharmacies, in an all-cash transaction for $5.3 million . The acquisition will expand the capabilities of Omnicell's Performance

23


Center™. The Company is in the process of evaluating the business combination accounting considerations, including the consideration transferred and the initial purchase price allocation.
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 within the meaning of Section 27A of the United States Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts are forward-looking statements and are contained principally in the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
our expectations regarding our future product bookings;
our ability to acquire companies, businesses, products or technologies on commercially reasonable terms and integrate such acquisitions effectively;
the extent and timing of future revenues, including the amounts of our current backlog, which represents firm orders that have not completed installation and therefore have not been recognized as revenue;
the size or growth of our market or market share;
the 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; 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," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. We discuss many of these risks in this annual report in greater detail in Part II - Item 1A. “Risk Factors” below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this annual report. You should also read this annual report and the documents that we reference in this annual report and have filed as exhibits, completely and 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.
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 anticipated in any forward-looking statements, even if new information becomes available in the future.
We own various trademarks, copyrights and trade names used in our business, including the following: Omnicell ® , the Omnicell logo, OmniRx ® , OmniCenter ® , OmniSupplier ® , OmniBuyer ® , SafetyStock ® , WorkflowRx™, OmniLinkRx™, Optiflex™, SinglePointe™, AnywhereRN™, Anesthesia Workstation™ , Savvy™, MTS Medication Technologies ® , the MTS Medication Technologies logo, Medlocker ® , AccuFlex ® , Autobond ™, AutoGen ™, easyBLIST™, Pandora ® , OnDemand ® , Multi-Med™, RxMap ® , MTS-350 ™, MTS-400 ™, MTS-500 ™ SureMed, ROBOT-Rx®, MedCarousel®, MedShelf-Rx™, PROmanager-Rx™, PACMED™, NarcStation™, PakPlus-Rx®, i.v.STATION™, i.v.SOFT®, Enterprise Medication Manager™, XT Anesthesia Workstation™, Performance Center™, Time My Meds ® and Automation Decision Support™ . This report also includes other trademarks, service marks and trade names of other companies. All other trademarks used in this report are trademarks of their respective holders.

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Table of Contents

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. Our Omnicell Automation and Analytic customers worldwide use our medication automation, supply chain and analytics solutions to help enable them to increase operational efficiency, reduce errors, deliver actionable intelligence and improve patient safety.
Omnicell Medication Adherence solutions, including the MTS and Ateb brands, provide innovative medication adherence packaging solutions that can help reduce costly hospital readmissions and enable institutional and retail pharmacies worldwide to maintain high accuracy and quality standards in medication dispensing and administration while optimizing productivity and controlling costs.
We sell our product and consumable solutions together with related service offerings. Revenue generated in the United States represented 88% and 84% of total revenue for the three months ended March 31, 2017 and 2016 , respectively. We expect our revenues from international operations to increase in future periods as we continue to grow our international business. 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.
Operating Segments
We manage our business as two operating segments, which are the same as our two reportable 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 includes the development manufacturing and selling of consumable medication blister cards, packaging equipment, pharmacy-based patient care software solutions including a medication synchronization platform, 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 name MTS, SureMed, Ateb, and the Omnicell brands. MTS products consist of proprietary medication packaging systems and related products for use by institutional pharmacies servicing long-term care and correctional facilities, or retail pharmacies serving patients in their local communities. Recently acquired Ateb is a provider of pharmacy-based patient care solutions and medication synchronization to independent and chain pharmacies.
For further description of our operating segments, refer to Note 13, Segment and Geographical Information, of the Notes to Consolidated Financial Statements in this quarterly report.
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 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 differentiated solutions. 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

25

Table of Contents

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 acquisition 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 introduced 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 who use AcuDose-Rx® cabinets can take advantage of the XT Series 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. Additionally, in February 2017 we introduced VBM 200F, an automated pharmacy solution that fills and checks SureMed® multiple medication blister cards utilizing guided light, barcode and RFID technologies to allow the filled tray to be audited throughout the entire packing process. This technology helps ensure that pharmacies have the competitive advantage to easily scale their business to help improve adherence and patient outcomes.
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 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 MTS in 2012, our acquisition of Surgichem in August 2014, our acquisitions of Mach4 and Avantec in April 2015, our acquisition of Aesynt in January 2016, our acquisition of Ateb in December 2016, and most recently, our acquisition of InPharmics in April 2017. Surgichem is a provider of medication adherence products in the United Kingdom. Mach4 is a provider of automated medication management systems to retail and hospital pharmacy customers primarily in Europe, with additional installations in China, the Middle East and Latin America. Avantec develops medication and supply automation products that complement our solutions for configurations suited to the United Kingdom marketplace, and has been the exclusive United Kingdom distributor for our medication and supply automation solutions since 2005. 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 pharmacies. InPharmics is a technology and services company that provides 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;
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

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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 by a contract and purchase order for equipment and software, and by a purchase order for consumables. Equipment and software bookings are 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. Our healthcare customers expect a high degree of partnership involvement from their technology suppliers throughout their ownership of the products. We provide extensive installation planning and consulting as part of every product sale and included in the initial price of the solution. Our customers' medication control systems are mission critical to their success and our customers require these systems to be functional at all times. To help assure the maximum availability of our systems, our customers typically purchase maintenance and support contracts in one, two or five year increments. As a result of the growth of our installed base of customers, our service revenues have also grown. We strive to provide the best service possible, as measured by third-party rating agencies and by our own surveys, to assure our customers continue to seek service maintenance from us.
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 2017, we also intend to manage our business to operating profit margins similar to those achieved in 2016, bringing our strategies to bear in all the markets in which we participate.
On February 15, 2017, we announced our intention to create 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 by approximately 100 full-time employees, or about 4% of the total headcount, and will be closing our Nashville, Tennessee and Slovenia facilities. Our full-time headcount was approximately 2,361 and 2,444 on March 31, 2017 on December 31, 2016 , respectively.
Recent Acquisitions
On January 5, 2016, we completed the acquisition of all of the membership interests of Aesynt. 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. The purchase price consideration was $271.5 million, net of cash acquired of $8.2 million. The results of Aesynt's operations have been included in our consolidated results of operations since January 6, 2016, and presented as part of the Automation & Analytics segment.
On December 8, 2016, we completed our acquisition of ateb, Inc., and Ateb Canada Ltd. (together, “Ateb”). Ateb is a provider of pharmacy-based patient care solutions and the medication synchronization solutions leader to independent and chain pharmacies with over one million active pharmacy patients. The purchase price consideration was $40.7 million, net of cash acquired of $0.9 million. The results of Ateb's operations have been included in our consolidated results of operations beginning December 9, 2016, and presented as part of the Medication Adherence segment.
On April 19, 2017, we announced the acquisition of InPharmics, a Mississippi-based technology and services company that provides advanced pharmacy informatics solutions to hospital pharmacies in an all-cash transaction for $5.3 million. The acquisition will expand the capabilities of Omnicell’s Performance Center™. We are in the process of evaluating the business combination accounting considerations, including the consideration transferred and the initial purchase price allocation.

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Table of Contents

CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. 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;
Accounts receivable and notes receivable (net investment in sales-type leases);
Inventory valuation;
Capitalized software development cost;
Valuation and impairment of goodwill, intangible assets and other long-lived assets;
Business combinations;
Valuation of share-based awards; and
Accounting for income taxes.
There have been 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, 2017 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, 2016 .
Recently adopted and 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 adopted and issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.
RESULTS OF OPERATIONS
Total Revenues
 
Three months ended March 31,
 
 
 
 
 
Change in
 
2017
 
2016
 
$
 
%
 
(Dollars in thousands)
Product revenues
$
98,930

 
$
127,895

 
$
(28,965
)
 
(23
)%
Percentage of total revenues
66
%
 
75
%
 
 
 
 
Service and other revenues
51,624

 
43,109

 
8,515

 
20
 %
Percentage of total revenues
34
%
 
25
%
 
 
 
 
Total revenues
$
150,554

 
$
171,004

 
$
(20,450
)
 
(12
)%
Product revenues represented 66% and 75% of total revenues for the three months ended March 31, 2017 and March 31, 2016 , respectively. Product revenues decreased by $29.0 million due to decreased sales for the Automation and Analytics segment of $28.1 million, and decreased sales for the Medication Adherence segment of $0.9 million. The decrease in the Automation and Analytics segment was attributed to slower conversion of bookings and backlog into revenue as result of the introduction of the XT series products in the fourth quarter of 2016. The decrease in the Medication Adherence segment was attributed to lower sales in the consumable product sales compared to the three months ended  March 31, 2016 primarily due to the timing of orders from several significant customers.
Service and other revenues represented 34% and 25% of total revenues for the three months ended March 31, 2017 and March 31, 2016 , respectively. Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues increased by $8.5 million primarily due to an increase from our Automation and Analytics segment of $3.4 million attributed to higher service renewal fees driven mainly by an increase in our installed

28


customer base. Service and other revenues from the Medication Adherence segment increased $5.2 million, primarily attributed to Ateb, acquired in the fourth quarter of 2016, which contributed $5.5 million to the service revenue during the three months ended March 31, 2017.
Our international sales represented 12% and 16% of total revenues for the three months ended March 31, 2017 and 2016 , respectively, and are expected to be affected by foreign currency exchange rates fluctuations. The decrease in international sales was primarily related to the recently acquired companies, Aesynt and Ateb, which have a higher market presence in United States compared to international markets. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates.
We anticipate our revenues to increase in 2017 compared to 2016 as we execute on our strategies, fulfill our existing orders and based on our anticipated growth in bookings. Our ability to continue to grow revenue is dependent on our ability to continue to obtain orders from customers, our ability to produce quality 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
Revenues
 
Three months ended March 31,
 
 
 
 
 
Change in
 
2017
 
2016
 
$
 
%
Revenues:
(Dollars in thousands)
Automation and Analytics
$
124,171

 
$
148,945

 
$
(24,774
)
 
(17
)%
Percentage of total revenues
82
%
 
87
%
 
 
 
 
Medication Adherence
26,383

 
22,059

 
4,324

 
20
 %
Percentage of total revenues
18
%
 
13
%
 
 
 
 
Total revenues
$
150,554

 
$
171,004

 
$
(20,450
)
 
(12
)%
The $24.8 million decrease in Automation and Analytics revenues for the three months ended March 31, 2017 in comparison to the three months ended March 31, 2016 was due to a decrease in product revenue of $28.1 million, partially offset by an increase in service revenues of $3.4 million. The decrease in the Automation and Analytics segment was attributed to slower conversion of bookings and backlog into revenue as result of the introduction of the XT series products in the fourth quarter of 2016. While we have experienced larger deal sizes, the administrative process of converting our existing bookings of G4 products into XT series products has decelerated the revenue recognition during the three months ended March 31, 2017 compared to the three months ended March 31, 2016. The service revenue increase of $3.4 million was primarily attributed to higher service renewal fees driven mainly by an increase in installed customer base.
Medication Adherence revenues increased by $4.3 million for the three months ended March 31, 2017 in comparison to the three months ended March 31, 2016 . The increase in revenue was primarily due to the increase in service revenue of $5.2 million, partially offset by the decrease of $0.9 million in product revenue attributed to lower consumable revenue due to timing of orders. The service revenue increase of $5.2 million was primarily attributed to Ateb, acquired in the fourth quarter of 2016, which contributed $5.5 million to the service revenue during 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 accounts 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.

29


 
Three months ended March 31,
 
 
 
 
 
Change in
 
2017
 
2016
 
$
 
%
Cost of revenues:
(Dollars in thousands)
Automation and Analytics
$
68,761

 
$
77,207

 
$
(8,446
)
 
(11
)%
As a percentage of related revenues
55
%
 
52
%
 
 
 
 
Medication Adherence
17,601

 
13,852

 
3,749

 
27
 %
As a percentage of related revenues
67
%
 
63
%
 
 
 
 
Total cost of revenues
$
86,362

 
$
91,059

 
$
(4,697
)
 
(5
)%
As a percentage of total revenues
57
%
 
53
%
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit:
 
 
 
 
 
 
 
Automation and Analytics
$
55,410

 
$
71,738

 
$
(16,328
)
 
(23
)%
Automation and Analytics gross margin
45
%
 
48
%
 
 
 
 
Medication Adherence
8,782

 
8,207

 
575

 
7
 %
Medication Adherence gross margin
33
%
 
37
%
 
 
 
 
Total gross profit
$
64,192

 
$
79,945

 
$
(15,753
)
 
(20
)%
Total gross margin
43
%
 
51
%
 
 
 
 
Cost of Revenues. The cost of revenues for the three months ended March 31, 2017 compared to the three months ended March 31, 2016 decreased by $4.7 million , of which $8.4 million was attributed to the decrease of cost of revenue in our Automation and Analytics segment, partially offset by $3.7 million of increased cost of revenue in our Medication Adherence segment. The decrease of the cost of revenue in the Automation and Analytics segment was attributed to a decrease of $24.8 million in product revenue, partially offset by severance expense of $1.3 million recognized during the three months ended March 31, 2017 in connection with the restructuring plan. The increase of the cost of revenue in the Medication Adherence segment was attributed to an increase of 20% in product revenue and severance expense of $0.4 million recognized during the three months ended March 31, 2017 in connection with the restructuring plan. Recently acquired Ateb contributed $3.1 million to the increase in cost of revenue.
Gross Profit. The gross profit for the three months ended March 31, 2017 decreased $15.8 million compared to the three months ended March 31, 2016 as a result of product mix, lower amortization of acquired intangibles of $2.3 million, partially offset by additional expense for restructuring related cost of $1.7 million, and share based compensation expense of $0.2 million.

30


Operating Expenses and Income (loss) from Operations
 
Three months ended March 31,
 
 
 
 
 
Change in
 
2017
 
2016
 
$
 
%
Operating expenses:
(Dollars in thousands)
Research and development
$
16,803

 
$
13,838

 
$
2,965

 
21
 %
As a percentage of total revenues
11
 %
 
8
%
 
 
 
 
Selling, general and administrative
64,625

 
64,255

 
370

 
1
 %
As a percentage of total revenues
43
 %
 
38
%
 
 
 
 
Total operating expenses
$
81,428

 
$
78,093

 
$
3,335

 
4
 %
As a percentage of total revenues
54
 %