Omnicell, Inc.
OMNICELL, Inc (Form: 10-Q, Received: 11/03/2017 16:05:53)
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 September 30, 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 October 26, 2017 , there were 37,932,401 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)
 
 
September 30,
2017
 
December 31,
2016
 
 
(In thousands, except par value)
 
 
ASSETS
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
7,466

 
$
54,488

 
Accounts receivable, net of allowances of $5,279 and $4,796, respectively
171,869

 
150,303

 
Inventories
92,239

 
69,297

 
Prepaid expenses
28,044

 
28,646

 
Other current assets
15,763

 
12,674

 
Total current assets
315,381

 
315,408

 
Property and equipment, net
40,219

 
42,011

 
Long-term investment in sales-type leases, net
15,986

 
20,585

 
Goodwill
334,780

 
327,724

 
Intangible assets, net
174,227

 
190,283

 
Long-term deferred tax assets
5,629

 
4,041

 
Other long-term assets
37,596

 
35,051

 
Total assets
$
923,818

 
$
935,103

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
 
 
 
 
Accounts payable
$
51,182

 
$
27,069

 
Accrued compensation
27,380

 
26,722

 
Accrued liabilities
33,061

 
31,195

 
Long-term debt, current portion, net
13,410

 
8,410

 
Deferred revenue, net
80,837

 
87,516

 
Total current liabilities
205,870

 
180,912

 
Long-term deferred revenue
16,376

 
17,051

 
Long-term deferred tax liabilities
40,527

 
51,592

 
Other long-term liabilities
9,625

 
8,210

 
Long-term debt, net
178,923

 
245,731

 
Total liabilities
451,321

 
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; 47,064 and 45,778 shares issued; 37,919 and 36,633 shares outstanding, respectively
47

 
46

 
Treasury stock at cost, 9,145 shares outstanding
(185,074
)
 
(185,074
)
 
Additional paid-in capital
565,406

 
525,758

 
Retained earnings
98,294

 
100,396

 
Accumulated other comprehensive loss
(6,176
)
 
(9,519
)
 
Total stockholders’ equity
472,497

 
431,607

 
Total liabilities and stockholders’ equity
$
923,818

 
$
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 September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Product
$
135,103

 
$
133,621

 
$
362,089

 
$
392,190

Services and other revenues
51,679

 
43,116

 
156,132

 
128,458

Total revenues
186,782

 
176,737

 
518,221

 
520,648

Cost of revenues:
 
 
 
 
 
 
 
Cost of product revenues
79,725

 
76,188

 
225,051

 
224,412

Cost of services and other revenues
22,204

 
19,041

 
66,150

 
56,766

Total cost of revenues
101,929

 
95,229

 
291,201

 
281,178

Gross profit
84,853

 
81,508

 
227,020

 
239,470

Operating expenses:
 
 
 
 
 
 
 
Research and development
16,414

 
15,264

 
50,128

 
42,896

Selling, general and administrative
58,725

 
61,316

 
186,818

 
189,912

Total operating expenses
75,139

 
76,580

 
236,946

 
232,808

Income (loss) from operations
9,714

 
4,928

 
(9,926
)
 
6,662

Interest and other income (expense), net
(2,732
)
 
(2,721
)
 
(4,992
)
 
(6,773
)
Income (loss) before provision for income taxes
6,982

 
2,207

 
(14,918
)
 
(111
)
Provision for (benefit from) income taxes
751

 
224

 
(11,232
)
 
(557
)
Net income (loss)
$
6,231

 
$
1,983

 
$
(3,686
)
 
$
446

Net income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.05

 
$
(0.10
)
 
$
0.01

Diluted
$
0.16

 
$
0.05

 
$
(0.10
)
 
$
0.01

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
37,698

 
36,332

 
37,266

 
36,020

Diluted
38,973

 
37,079

 
37,266

 
36,695

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 INCOME (LOSS) (UNAUDITED)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Net income (loss)
$
6,231

 
$
1,983

 
$
(3,686
)
 
$
446

Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
   Unrealized gains (losses) on interest rate swap contracts
(74
)
 
108

 
(45
)
 
108

   Foreign currency translation adjustments
1,389

 
(502
)
 
3,388

 
(5,296
)
Other comprehensive income (loss)
1,315

 
(394
)
 
3,343

 
(5,188
)
Comprehensive income (loss)
$
7,546

 
$
1,589

 
$
(343
)
 
$
(4,742
)
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)
 
Nine months ended September 30,
 
2017
 
2016
 
(In thousands)
Operating Activities
 
 
 
Net income (loss)
$
(3,686
)
 
$
446

Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Depreciation and amortization
38,542

 
43,905

Loss on disposal of fixed assets
128

 
(9
)
Share-based compensation expense
16,315

 
14,063

Income tax benefits from employee stock plans
11

 
1,256

Deferred income taxes
(11,071
)
 
(4,767
)
Amortization of debt financing fees
1,192

 
1,192

Changes in operating assets and liabilities, net of business acquisitions:
 
 
 
Accounts receivable
(21,710
)
 
(25,802
)
Inventories
(22,942
)
 
(7,745
)
Prepaid expenses
602

 
(5,782
)
Other current assets
(5,133
)
 
(89
)
Investment in sales-type leases
6,643

 
(5,296
)
Other long-term assets
(150
)
 
1,153

Accounts payable
23,717

 
5,573

Accrued compensation
658

 
(687
)
Accrued liabilities
4,021

 
(1,901
)
Deferred revenue
(7,354
)
 
12,819

Other long-term liabilities
865

 
(2,299
)
Net cash provided by operating activities
20,648

 
26,030

Investing Activities
 
 
 
Purchases of intangible assets, intellectual property and patents
(160
)
 
(1,311
)
Software development for external use
(10,121
)
 
(10,569
)
Purchases of property and equipment
(9,374
)
 
(10,005
)
Business acquisitions, net of cash acquired
(4,446
)
 
(271,458
)
Net cash used in investing activities
(24,101
)
 
(293,343
)
Financing Activities
 
 
 
Proceeds from debt
37,000

 
247,051

Repayment of debt and revolving credit facility
(100,000
)
 
(25,000
)
Payment for contingent consideration
(2,400
)
 
(3,000
)
Proceeds from issuances under stock-based compensation plans
26,468

 
16,516

Employees' taxes paid related to restricted stock units
(3,133
)
 
(1,917
)
Net cash provided by (used in) financing activities
(42,065
)
 
233,650

Effect of exchange rate changes on cash and cash equivalents
(1,504
)
 
(1,267
)
Net decrease in cash and cash equivalents
(47,022
)
 
(34,930
)
Cash and cash equivalents at beginning of period
54,488

 
82,217

Cash and cash equivalents at end of period
$
7,466

 
$
47,287

 
 
 
 
Supplemental disclosure of non-cash activities
 
 
 
Unpaid purchases of property and equipment
$
886

 
$
948

Effect of adoption of new accounting standard
$
1,582

 
$

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

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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 September 30, 2017 and December 31, 2016 , the results of its operations, comprehensive income (loss) and cash flows for the three and nine months ended September 30, 2017 and September 30, 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 and nine months ended September 30, 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 with the adoption of ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting . Additionally, see "Recently adopted authoritative guidance" for the effects of first quarter adoption of ASU 2016-09.
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company's Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company's critical accounting policies are those that affect its financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, accounts receivable and notes receivable from investment in sales-type leases, inventory valuation, capitalized software development costs, valuation and impairment of goodwill, purchased intangibles and long-lived assets, fair value of assets acquired and liabilities assumed in business combination, share-based compensation, and accounting for income taxes.
Segment reporting
The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company's segments using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs that are not specific to either of the reportable segments and are managed separately at the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain other administrative expenses. See Note 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. 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 $2.1 million and $4.7 million for the three and nine months ended September 30, 2017, respectively.  Additionally, in the first quarter of 2017, 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.
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 2017-04 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 periods 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 periods presented.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815) , which simplifies the application of the hedge accounting guidance and improves the financial reporting, specifically simplifies designation and measurement for qualifying hedging relationships and the presentation of hedge results. ASU 2017-12 is effective for annual periods beginning after December 15, 2018 and interim periods within those annual periods with early adoption permitted. The Company adopted ASU 2017-12 effective August 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 periods 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. While the Company currently expects to apply the full retrospective method, the Company is continuing to evaluate the availability of information and resources necessary and may decide the benefit of applying the full retrospective method is not significant enough to support the cost.  
Currently, the Company is in the process of reviewing its historical contracts to quantify the impact on its consolidated financial statements. The most significant impact of the standard relates to accounting for term software license revenue, contingent income, and commission expense.  Specifically, under the standard the Company expects to recognize revenue on term software licenses upon installation of the license rather than ratably over the life of the term license.  Additionally, the

8


standard no longer requires deferral of contingent revenue in transactions where the amount charged to the customer for a particular performance obligation is less than the allocation of standalone selling price which will result in earlier recognition of revenue.  Finally, the standard requires expense to be recognized for incremental costs incurred to obtain a contract, primarily commission expense, on a systematic basis that is consistent with the transfer to the customer of the product and services to which the cost relates, including an estimate of the period of service renewals for the transaction. Currently, the Company recognizes commission expense at the time of recognizing the related product revenue. 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 expects to complete its assessment process within the last quarter 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
2017 Acquisitions
On April 12, 2017, the Company completed the acquisition of all of the membership interest of Dixie Drawl, LLC d/b/a InPharmics ("InPharmics") pursuant to InPharmics' Member Interest Purchase Agreement. InPharmics is a technology and services company that provides advanced pharmacy informatics solutions to hospital pharmacies. The total consideration for the transaction was $5.0 million , net of cash on hand at signing of $0.3 million . Approximately $0.5 million of the total consideration was classified as a long-term liability for potential settlement of performance obligations. The Company accounted for the acquisition of InPharmics in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The purchase price was preliminary allocated to intangible assets in the amount of $1.9 million , which included developed technology and customer contracts, with the remainder allocated to goodwill. The results of the InPharmics' operations have been included in our consolidated results of operations, and presented as part of the Automation and Analytics segment.
2016 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 the Company's 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 on hand. 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 the Company's 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:

9


 
Aesynt
 
Ateb
(preliminary)
 
Total
 
(in thousands)
Cash
$
8,164

 
$
902

 
$
9,066

Accounts receivable
43,312

 
7,761

 
51,073

Inventory
19,021

 
225

 
19,246

Other current assets
3,787

 
1,239

 
5,026

      Total current assets
74,284

 
10,127

 
84,411

Property and equipment
10,389

 
2,447

 
12,836

Intangibles
123,700

 
12,500

 
136,200

Goodwill
163,599

 
21,651

 
185,250

Other non-current assets
968

 
334

 
1,302

      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

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 $21.7 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 (Preliminary)
 
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.

10


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 September 30, 2017 , none of the IPR&D projects have been completed, and they have progressed as previously estimated and are expected to be completed in fiscal 2018.
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 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 Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares outstanding during the period, less shares repurchased. In periods of net loss, all potential common shares are anti-dilutive, so diluted net loss per share equals the basic net loss per share. In periods of net income, diluted net income per share is computed by dividing net income for the period by the basic weighted-average number of shares plus any dilutive potential common stock outstanding during the period. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards and restricted stock units computed using the treasury stock method. Any anti-dilutive weighted-average dilutive shares related to stock award plans are excluded from the computation of the diluted net income per share.

11


The basic and diluted net income (loss) per share calculation for the three and nine months ended September 30, 2017 and 2016 is as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Net income (loss)
$
6,231

 
$
1,983

 
$
(3,686
)
 
$
446

Weighted-average shares outstanding — basic
37,698

 
36,332

 
37,266

 
36,020

Effect of dilutive securities from stock award plans
1,275

 
747

 

 
675

Weighted-average shares outstanding — diluted
$
38,973

 
$
37,079

 
37,266

 
36,695

Net income (loss) per share - basic
$
0.17

 
$
0.05

 
$
(0.10
)
 
$
0.01

Net income (loss) per share - diluted
$
0.16

 
$
0.05

 
$
(0.10
)
 
$
0.01

 
 
 
 
 
 
 
 
Anti-dilutive weighted-average shares related to stock award plans
1,383

 
326

 
3,757

 
1,255

Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $7.5 million and $54.5 million as of September 30, 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 of $3.0 million based on the achievement of bookings targets. The Company has concluded that only $2.4 million of the total potential earn out payment has been earned, which was paid out during the three month period ended September 30, 2017 .
The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of September 30, 2017 :
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Interest rate swap contracts
$

 
$
1,200

 
$

 
$
1,200

Total financial assets
$

 
$
1,200

 
$

 
$
1,200

There have been no transfers between fair value measurement levels during the nine months ended September 30, 2017 and September 30, 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.

12


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 September 30, 2017 and December 31, 2016 was $1.2 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 September 30, 2017 and December 31, 2016 are presented in the tables below:
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Inventories:
 
 
 
Raw materials
$
20,736

 
$
14,322

Work in process
10,769

 
7,800

Finished goods
60,734

 
47,175

Total inventories
$
92,239

 
$
69,297

 
 
 
 
Prepaid expense
 
 
 
Prepaid commissions
$
11,622

 
$
13,176

Other prepaid expenses
16,422

 
15,470

Total prepaid expense
$
28,044

 
$
28,646

 
 
 
 
Property and equipment:
 
 
 
Equipment
$
70,343

 
$
64,384

Furniture and fixtures
6,881

 
6,517

Leasehold improvements
10,143

 
9,778

Software
37,574

 
35,607

Construction in progress
8,083

 
7,211

Property and equipment, gross
133,024

 
123,497

Accumulated depreciation and amortization
(92,805
)
 
(81,486
)
Total property and equipment, net
$
40,219

 
$
42,011

 
 
 
 
Other long term assets:
 
 
 
Capitalized software, net
$
36,713

 
$
33,233

Other assets
883

 
1,818

Total other long term assets, net
$
37,596

 
$
35,051

 
 
 
 

13


 
September 30,
2017
 
December 31,
2016
Accrued liabilities:
 
 
 
Advance payments from customers
$
7,780

 
$
7,030

Rebates and lease buyouts
5,943

 
4,025

Group purchasing organization fees
3,380

 
3,737

Taxes payable
5,575

 
4,003

Other accrued liabilities
10,383

 
12,400

Total accrued liabilities
$
33,061

 
$
31,195

The following tables summarize the changes in accumulated balances of other comprehensive income (loss) for the three and nine months ended September 30, 2017 and 2016 :
 
Three months ended September 30,
 
2017
 
2016
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
(In thousands)
Beginning balance
$
(8,765
)
 
$
1,274

 
$
(7,491
)
 
$
(7,524
)
 
$

 
$
(7,524
)
     Other comprehensive income (loss) before reclassifications
1,389

 
35

 
1,424

 
(502
)
 
108

 
(394
)
     Amounts reclassified from other comprehensive income (loss), net of tax

 
(109
)
 
(109
)
 

 

 

     Net current-period other comprehensive income (loss), net of tax
1,389

 
(74
)
 
1,315

 
(502
)
 
108

 
(394
)
Ending balance
$
(7,376
)
 
$
1,200

 
$
(6,176
)
 
$
(8,026
)
 
$
108

 
$
(7,918
)
 
Nine months ended September 30,
 
2017
 
2016
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
Foreign currency translation adjustments
 
Unrealized gain (loss) on interest rate swap hedges
 
Total
 
(In thousands)

 
 
 
 
 
 
Beginning balance
$
(10,764
)
 
$
1,245

 
$
(9,519
)
 
$
(2,730
)
 
$

 
$
(2,730
)
     Other comprehensive income (loss) before reclassifications
3,388

 
111

 
3,499

 
(5,296
)
 
108

 
(5,188
)
     Amounts reclassified from other comprehensive income (loss), net of tax

 
(156
)
 
(156
)
 

 

 

     Net current-period other comprehensive income (loss), net of tax
3,388

 
(45
)
 
3,343

 
(5,296
)
 
108

 
(5,188
)
Ending balance
$
(7,376
)
 
$
1,200

 
$
(6,176
)
 
$
(8,026
)
 
$
108

 
$
(7,918
)

Note 6. Net Investment in Sales-Type Leases
On a recurring basis, we enter into sales-type lease transactions with the majority varying in length from one to five years. The receivables as a result of these types of transactions are collateralized by the underlying equipment leased and consist of the following components at September 30, 2017 and December 31, 2016 :  

14


 
September 30,
2017
 
December 31,
2016
 
(In thousands)
Net minimum lease payments to be received
$
26,173

 
$
33,591

  Less: Unearned interest income portion
(1,986
)
 
(2,763
)
Net investment in sales-type leases
24,187

 
30,828

  Less: Short-term portion (1)
(8,201
)
 
(10,243
)
Long-term net investment in sales-type leases
$
15,986

 
$
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 September 30, 2017 and of December 31, 2016 , respectively.
At September 30, 2017 , the future minimum lease payments under sales-type leases are as follows:
 
September 30,
2017
 
(In thousands)
Remaining three months of 2017
$
2,470

2018
8,038

2019
6,474

2020
4,548

2021
2,749

Thereafter
1,894

Total
$
26,173

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

  Goodwill acquired
3,113

 
819

 
3,932

  Foreign currency exchange rate fluctuations
2,351

 
773

 
3,124

Net balance as of September 30, 2017
$
220,546

 
$
114,234

 
$
334,780

Goodwill acquired in the Automation and Analytics segment represents the value assigned to goodwill as part of the InPharmics acquisition. Goodwill acquired in the Medication Adherence segment represents adjustments to the preliminary value assigned to goodwill in connection with Ateb acquisition to reflect measurement period adjustments related to accounts receivable and other non-current assets of $0.1 million and $0.7 million , respectively.
Intangible assets, net
The carrying amounts of intangibles assets as of September 30, 2017 and December 31, 2016 are as follows:

15


 
September 30, 2017
 
Gross
carrying
amount
 
Accumulated
amortization
 
 Foreign currency exchange rate fluctuations
 
Net
carrying
amount
 
Useful life
(years)
 
(In thousands, except for years)
Customer relationships
$
133,456

 
$
(30,421
)
 
$
297

 
$
103,332

 
1 - 30
Acquired technology
74,457

 
(19,493
)
 
75

 
55,039

 
3 - 20
Backlog
21,702

 
(16,654
)
 

 
5,048

 
1 - 5
Trade names
8,683

 
(4,508
)
 
13

 
4,188

 
1 - 12
Patents
3,290

 
(1,331
)
 
(6
)
 
1,953

 
2 - 20
Non-compete agreements
1,900

 
(1,133
)
 

 
767

 
3
In-process technology
3,900

 

 

 
3,900

 
Total intangibles assets, net
$
247,388

 
$
(73,540
)
 
$
379

 
$
174,227

 
 
 
 
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 $6.4 million and $8.9 million for the three months ended September 30, 2017 and 2016 , respectively. Amortization expense of intangible assets was $19.4 million and $27.2 million for the nine months ended September 30, 2017 and 2016 , respectively.
The estimated future amortization expenses for amortizable intangible assets are as follows:
 
September 30, 2017
 
(In thousands)
Remaining three months of 2017
$
6,166

2018
23,302

2019
17,837

2020
16,631

2021
15,065

Thereafter (excluding in-process technology)
91,326

Total
$
170,327

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

16


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 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 $40.0 million under the Revolving Credit Facility to complete the Ateb acquisition and pay related fees and expenses. On April 3, 2017, the Company borrowed an additional $10.0 million under the Revolving Credit Facility to pay for the InPharmics acquisition and fund its operations. On July 7, 2017 and July 31, 2017, the Company borrowed an additional $15.0 million and $12.0 million , respectively, under the Revolving Credit Facility to fund its operations. As of September 30, 2017 the Company has repaid $134.5 million borrowed under these Facilities, which includes $100.0 million repaid during the nine months ended September 30, 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 $1.6 million and $1.2 million for the three months ended September 30, 2017 and 2016 , respectively. Interest expense (exclusive of fees and issuance cost amortization) was approximately $4.6 million and $4.0 million for the nine months ended September 30, 2017 and 2016 , respectively. The Company was in full compliance with all covenants as of September 30, 2017 and December 31, 2016 .
The components of the Company’s debt obligations for the nine months ended September 30, 2017 are as follows:

17


 
December 31, 2016
 
Borrowings
 
Repayment / Amortization
 
September 30, 2017
 
(In thousands)
Term loan facility
$
192,500

 
$

 
$
(7,500
)
 
$
185,000

Revolving credit facility
68,000

 
37,000

 
(92,500
)
 
12,500

   Total debt under the facilities
260,500

 
37,000

 
(100,000
)
 
197,500

   Less: Deferred issuance cost
(6,359
)
 

 
1,192

 
(5,167
)
   Total Debt, net of deferred issuance cost
$
254,141

 
$
37,000

 
$
(98,808
)
 
$
192,333

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

 
 
 
 
 
13,410

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

 
 
 
 
 
$
178,923

As of  September 30, 2017 , the carrying amount of debt of $197.5 million  approximates the comparable fair value of $199.2 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.
Note 9. Deferred revenue
Short-term deferred revenue includes deferred revenue from product sales and service contracts, net of deferred cost of sales of $14.5 million and $14.2 million as of September 30, 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 $16.4 million and $17.1 million , as of September 30, 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 September 30, 2017 , the minimum future payments on non-cancelable operating leases were as follows:
 
(In thousands)
Remaining three months of 2017
$
3,203

2018
12,447

2019
12,270

2020
10,972

2021
10,316

Thereafter
31,168

Total minimum future lease payments
$
80,376

 
Purchase obligations
In the ordinary course of business, the Company issues purchase orders based on its current manufacturing needs. At September 30, 2017 , the Company had non-cancelable purchase commitments of $59.9 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

18


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 generally provides for income taxes in interim periods based on the estimated annual effective tax rate for the year, adjusting for discrete items in the quarter in which they arise. For the three month ended September 30, 2017, the provision for income taxes was computed based on the actual effective tax rate for the year-to-date by applying the discrete method. The Company determined that as small changes in estimated “ordinary” income result in significant changes in the estimated annual effective tax rate, the actual effective tax rate provided a more accurate income tax provision for the reporting period ended September 30, 2017. The estimated effective tax rate before discrete items was 34.4% and 38.3% for the nine months ended September 30, 2017 and 2016 , respectively.
The estimated effective tax rate for the nine months ended September 30, 2017 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 favorable impact of the Research & Development credits. The effective tax rate for the nine months ended September 30, 2016 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, Research & Development credits 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.
As of September 30, 2017 and December 31, 2016 , the Company had gross unrecognized tax benefits of $6.8 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 September 30, 2017 and December 31, 2016 , the amount of accrued interest and penalties was $1.2 million and $0.7 million , respectively.
As of September 30, 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 year 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 the Company's 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
 
Nine months ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
 
(In thousands)
Cost of product and service revenues
$
882

 
$
628

 
$
2,727

 
$
1,821

Research and development
915

 
825

 
2,651

 
2,267

Selling, general and administrative
3,462

 
3,224

 
10,937

 
9,975

Total share-based compensation expense
$
5,259

 
$
4,677

 
$
16,315

 
$
14,063


19


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 and nine months ended September 30, 2017 and 2016 :
 
Three months ended
 
Nine months ended
 
September 30, 2017
 
September 30, 2016
 
September 30, 2017
 
September 30, 2016
Stock Option Plans
 
 
 
 
 
 
 
Expected life, years
4.67

 
4.92

 
4.67

 
4.92

Expected volatility, %
28.1
%
 
30.0
%
 
29.2
%
 
31.4
%
Risk free interest rate, %
1.81
%
 
1.21
%
 
1.83
%
 
1.34
%
Estimated forfeiture rate %
7.7
%
 
8.6
%
 
7.7
%
 
8.6
%
Dividend yield, %
%
 
%
 
%
 
%
 
Three months ended
 
Nine months ended
 
September 30,
2017
 
September 30,
2016
 
September 30, 2017
 
September 30, 2016
Employee Stock Purchase Plan
 
 
 
 
 
 
 
Expected life, years
0.5-2.0

 
0.5-2.0

 
0.5-2.0

 
0.5-2.0

  Expected volatility, %
26.7-32.1%

 
25.8-34.8%

 
25.8-32.8%

 
25.8-34.8%

  Risk free interest rate, %
0.61-1.39%

 
0.41-0.79%

 
0.52-1.39%

 
0.34-0.79%

  Dividend yield, %
%
 
%
 
%
 
%
Stock options activity
The following table summarizes the share option activity under the Company’s equity incentive plans during the nine months ended September 30, 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
504

 
38.87

 
 
 
 
Exercised
(668
)
 
21.66

 
 
 
 
Expired
(6
)
 
27.53

 
 
 
 
Forfeited
(79
)
 
32.54

 
 
 
 
Outstanding at September 30, 2017
2,965

 
$
29.06

 
7.4
 
$
65,247

Exercisable at September 30, 2017
1,252

 
$
22.36

 
5.5
 
$
35,915

Vested and expected to vest at September 30, 2017 and thereafter
2,965

 
$
29.06

 
7.4
 
$
65,247

The weighted-average fair value per share of options granted during the three months ended September 30, 2017 and 2016 was $12.49 and $10.32 , respectively, and the weighted-average fair value per share of options granted during the nine months ended September 30, 2017 and 2016 was $11.22 and $8.82 , respectively. The intrinsic value of options exercised during the three months ended September 30, 2017 and 2016 was $6.8 million and $2.1 million , respectively, and the intrinsic value of options exercised during the nine months ended September 30, 2017 and 2016 was $14.6 million and $5.0 million , respectively,
As of September 30, 2017 , total unrecognized compensation cost related to unvested stock options was $13.7 million , which is expected to be recognized over a weighted-average vesting period of 2.8 years.
Restricted stock activity
The following table summarizes the restricted stock activity under the Company’s equity incentive plans during the nine months ended September 30, 2017 :

20


 
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
93

 
37.86

 
 
 
 
Vested
(126
)
 
29.19

 
 
 
 
Forfeited
(16
)
 
32.17

 
 
 
 
Outstanding and unvested at September 30, 2017
456

 
$
33.33

 
1.2
 
$
23,257

The weighted-average grant date fair value per share of RSUs granted during the nine months ended September 30, 2017 and September 30, 2016 was $37.86 and $29.19 , respectively.
As of September 30, 2017 , total unrecognized compensation expense related to RSUs was $11.4 million , which is expected to be recognized over the remaining weighted-average vesting period of 2.4 years.
 
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
24

 
41.10

Vested
(30
)
 
31.58

Forfeited

 

Outstanding and unvested at September 30, 2017
24

 
$
41.05

As of September 30, 2017 , total unrecognized compensation cost related to RSAs was $0.6 million , which is expected to be recognized over the remaining weighted-average vesting period of 0.64 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 nine months ended September 30, 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
146

 
33.89

Vested
(69
)
 
24.43

Forfeited

 

Outstanding and unvested at September 30, 2017
261

 
$
30.06

The weighted-average grant date fair value per share of PSUs granted during the nine months ended September 30, 2017 and 2016 was $33.89 and $24.66 , respectively. As of September 30, 2017 , total unrecognized compensation cost related to PSUs was $3.5 million , which is expected to be recognized over the remaining weighted-average period of 1.3 years.
Employee Stock Purchase Plan activity
For the nine months ending September 30, 2017 and 2016 , purchases under the ESPP were approximately 465,696 and 420,000 shares at weighted average prices of $25.78 and $23.23 , respectively. As of September 30, 2017 , the unrecognized

21


compensation cost related to the shares to be purchased under the ESPP was approximately $1.6 million and is expected to be recognized over a weighted-average period of 1.6 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 September 30, 2017 :
 
Number of Shares
 
(In thousands)
Share options outstanding
2,965

Non-vested restricted share awards
741

Shares authorized for future issuance
2,191

ESPP shares available for future issuance
2,365

Total shares reserved for future issuance
8,262

Stock Repurchase Program
On August 2, 2016, the Company's Board of Directors (the "Board") authorized a stock repurchase program providing for the repurchase of up to $50.0 million of the Company’s common stock (the “2016 Repurchase Program”). The 2016 Repurchase Program is in addition to the stock repurchase program approved by the Board on November 4, 2014 (the “2014 Repurchase Program”). As of September 30, 2017 , the maximum dollar value of shares that may yet be purchased under the two repurchase programs was $54.9 million . The stock repurchase programs do not obligate the Company to repurchase any specific number of shares, and the Company may terminate or suspend the repurchase program at any time.
During the three and nine months period ended September 30, 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 tables summarize the financial performance of the Company's reportable segments, including a reconciliation of income from segment operations to income from total operations:

22


 
Three months ended
 
September 30, 2017
 
September 30, 2016
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Revenues
$
154,651

 
$
32,131

 
$
186,782

 
$
152,437

 
$
24,300

 
$
176,737

Cost of revenues
79,740

 
22,189

 
101,929

 
77,828

 
17,401

 
95,229

Gross profit
74,911

 
9,942

 
84,853

 
74,609

 
6,899

 
81,508

Operating expenses
46,849

 
9,901

 
56,750

 
49,123

 
6,137

 
55,260

Income (loss) from segment operations
$
28,062

 
$
41

 
$
28,103

 
$
25,486

 
$
762

 
$
26,248

Corporate costs
 
 
 
 
18,389

 
 
 
 
 
21,320

Income (loss) from operations
 
 
 
 
$
9,714

 
 
 
 
 
$
4,928


 
Nine months ended
 
September 30, 2017
 
September 30, 2016
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total  
 
(In thousands)
Revenues
$
427,250

 
$
90,971

 
$
518,221

 
$
450,043

 
$
70,605

 
$
520,648

Cost of revenues
229,218

 
61,983

 
291,201

 
233,401

 
47,777

 
281,178

Gross profit
198,032

 
28,988

 
227,020

 
216,642

 
22,828

 
239,470

Operating expenses
146,651

 
31,196

 
177,847

 
151,108

 
17,518

 
168,626

Income (loss) from segment operations
$
51,381

 
$
(2,208
)
 
$
49,173

 
$
65,534

 
$
5,310

 
$
70,844

Corporate costs
 
 
 
 
59,099

 
 
 
 
 
64,182

Income (loss) from operations
 
 
 
 
$
(9,926
)
 
 
 
 
 
$
6,662

Significant customers
There were no customers that accounted for more than 10% of our total revenues for the three and nine months ended September 30, 2017 and 2016 . Also, there were no customers that accounted for more than 10% of our accounts receivable as of September 30, 2017 and December 31, 2016 .

23


Geographical Information
Revenues
 
Three months ended
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
United States
$
164,190

 
$
155,989

Rest of world (1)
22,592

 
20,748

Total revenues
$
186,782

 
$
176,737

 
Nine months ended
 
September 30,
2017
 
September 30,
2016
 
(In thousands)
United States
$
449,755

 
$
445,470

Rest of world (1)
68,466

 
75,178

Total revenues
$
518,221

 
$
520,648

_________________________________________________
(1)     No individual country represented more than 10% of the respective totals.
      Property and equipment, net
 
September 30,
2017
 
December 31,
2016
 
(In thousands)
United States
$
33,620

 
$
36,497

Rest of world (1)
6,599

 
5,514

Total property and equipment, net
$
40,219

 
$
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 $4.3 million , which includes estimated employee severance cost of approximately $3.8 million , and facility-related costs of approximately $0.5 million .

During the nine months ended September 30, 2017 , the Company accrued $3.8 million of severance and related expenses, and paid out $3.2 million . The remaining unpaid balance of $0.6 million accrued severance and related expenses as of September 30, 2017 is presented as a component of accrued compensation in the Condensed Consolidated Balance Sheet.

There were $0.6 million of facility-related costs incurred during the nine months ended September 30, 2017 , of which $0.2 million was paid out. The remaining unpaid balance of $0.4 million accrued facilities-related expenses as of September 30, 2017 is presented as a component of accrued liabilities in the Condensed Consolidated Balance Sheet.

For the three and nine months periods ending September 30, 2017, the total restructuring expense was $0 and $4.3 million , respectively.

During the second quarter of 2016, the Company integrated its Sales and Field organizations in North America to better serve its customers which resulted in a reduction in headcount of 36 employees. Accordingly, the Company incurred approximately $1.7 million of restructuring expenses in the nine months ended September 30, 2016, based on agreements with

24


terminated employees covering salary and benefit continuation. As of September 30, 2016 the restructuring program has been concluded.

Note 15. Subsequent Event
On October 2, 2017 and October 10, 2017, the Company borrowed $12.0 million and $10.0 million , respectively, under the Revolving Credit Facility to fund its operations.
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 ali