Omnicell, Inc.
OMNICELL, Inc (Form: 10-Q, Received: 11/08/2013 17:19:58)
Table of Contents

 
 
 
 
 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
——————————————————————————————————————
FORM  10-Q
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2013
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 Number 000-33043
——————————————————————————————————————

Omnicell, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
94-3166458
(State or other jurisdiction
 
(I.R.S. Employer
of incorporation or organization)
 
Identification No.)
 
590 East Middlefield Rd.
Mountain View, CA 94043
(650) 251-6100
(Address, including zip code, of registrant’s principal executive
offices and 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  x  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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  x No  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  o
 
Accelerated filer  x
 
 
 
Non-accelerated filer  o
 
Smaller reporting company  o
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x
 
The number of shares of Registrant’s common stock (par value $0.001) outstanding as of November 1, 2013 was 35,614,670 .



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Table of Contents

PART I — FINANCIAL INFORMATION
 
Item 1.
Financial Statements
 
OMNICELL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
September 30,
2013
 
December 31,
2012
 
 
(unaudited)
 
(1)
 
ASSETS
 

 
 

 
Current assets:
 

 
 

 
Cash and cash equivalents
$
116,190

 
$
62,313

 
Accounts receivable, net of allowances of $579 and $722 at September 30, 2013 and December 31, 2012, respectively
63,999

 
55,116

 
Inventories
30,705

 
26,903

 
Prepaid expenses
17,053

 
15,392

 
Deferred tax assets
11,860

 
11,860

 
Other current assets
8,052

 
9,172

 
Total current assets
247,859

 
180,756

 
Property and equipment, net
33,492

 
34,107

 
Non-current net investment in sales-type leases
12,398

 
13,228

 
Goodwill
111,343

 
111,407

 
Other intangible assets
82,530

 
85,550

 
Non-current deferred tax assets
1,293

 
993

 
Other assets
17,069

 
15,778

 
Total assets
$
505,984

 
$
441,819

 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 

 
 

 
Current liabilities:
 

 
 

 
Accounts payable
$
24,717

 
$
18,255

 
Accrued compensation
12,876

 
11,613

 
Accrued liabilities
14,019

 
11,988

 
Deferred service revenue
22,247

 
20,449

 
Deferred gross profit
25,206

 
20,772

 
Total current liabilities
99,065

 
83,077

 
Non-current deferred service revenue
17,657

 
19,892

 
Non-current deferred tax liabilities
26,053

 
26,491

 
Other long-term liabilities
5,423

 
4,809

 
Total liabilities
148,198

 
134,269

 
Stockholders’ equity:
 

 
 

 
Total stockholders’ equity
357,786

 
307,550

 
Total liabilities and stockholders’ equity
$
505,984

 
$
441,819

 
(1)  Information derived from our December 31, 2012 audited Condensed Consolidated Financial Statements.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

OMNICELL, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
 
                           

 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2013
 
2012
2013
 
2012
Revenues:
 

 
 

 

 
 

Product revenues
$
75,508

 
$
67,446

$
220,325

 
$
175,239

Services and other revenues
18,531

 
16,885

54,510

 
48,619

Total revenues
94,039

 
84,331

274,835

 
223,858

Cost of revenues:
 

 
 

 

 
 

Cost of product revenues
33,977

 
30,636

103,810

 
79,532

Cost of services and other revenues
8,022

 
7,608

24,250

 
23,114

Total cost of revenues
41,999

 
38,244

128,060

 
102,646

Gross profit
52,040

 
46,087

146,775

 
121,212

Operating expenses:
 

 
 

 

 
 

Research and development
6,561

 
5,545

21,665

 
17,538

Selling, general and administrative
34,762

 
29,316

100,866

 
86,382

Total operating expenses
41,323

 
34,861

122,531

 
103,920

Income from operations
10,717

 
11,226

24,244

 
17,292

Interest and other income (expense), net
25

 
34

(134
)
 
57

Income before provision for income taxes
10,742

 
11,260

24,110

 
17,349

Provision for income taxes
2,987

 
4,340

6,954

 
6,703

Net income
$
7,755

 
$
6,920

$
17,156

 
$
10,646

Net income per share-basic
$
0.22

 
$
0.21

$
0.50

 
$
0.32

Net income per share-diluted
$
0.21

 
$
0.20

$
0.48

 
$
0.31

Weighted average shares outstanding:
 

 
 

 

 
 

Basic
35,133

 
33,193

34,499

 
33,316

Diluted
36,190

 
34,068

35,466

 
34,241

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

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Table of Contents

OMNICELL, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
7,755

 
$
6,920

 
$
17,156

 
$
10,646

Other comprehensive income (loss) and reclassification adjustments:
 
 
 
 
 
 
 
   Unrealized holding losses on securities arising during the period

 

 

 
(1
)
   Changes in fair value of foreign currency forward hedges

 

 
(65
)
 
65

   Foreign currency translation adjustment
217

 
70

 
21

 
54

Other comprehensive income (loss)
217

 
70

 
(44
)
 
118

Comprehensive income
$
7,972

 
$
6,990

 
$
17,112

 
$
10,764


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


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Table of Contents

OMNICELL, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
 
Nine Months Ended September 30,
 
2013
 
2012
Cash flows from operating activities:
 

 
 
Net income
$
17,156

 
$
10,646

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
13,732

 
9,247

Loss on disposal of fixed assets
289

 
28

Impairment of software development costs

1,759

 

Provision for receivable allowance
110

 
410

Share-based compensation expense
8,387

 
6,781

Income tax benefits from employee stock plans
1,707

 
1,638

Excess tax benefits from employee stock plans
(2,827
)
 
(2,336
)
Provision for excess and obsolete inventories
911

 
509

Deferred income taxes
(737
)
 
(1,084
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(9,004
)
 
(7,103
)
Inventories
(4,713
)
 
2,924

Prepaid expenses
(1,661
)
 
(3,453
)
Other current assets
(394
)
 
921

Net investment in sales-type leases
1,313

 
(1,493
)
Other assets
307

 
(13
)
Accounts payable
6,462

 
2,131

Accrued compensation
1,263

 
802

Accrued liabilities
2,031

 
(1,719
)
Deferred service revenue
(403
)
 
2,117

Deferred gross profit
4,434

 
5,377

Other long-term liabilities
615

 
1,147

Net cash provided by operating activities
40,737

 
27,477

Cash flows from investing activities:
 

 
 
Maturities of short-term investments

 
8,122

Acquisition of intangible assets and intellectual property
(225
)
 
(303
)
Software development for external use
(5,694
)
 
(3,118
)
Purchases of property and equipment
(7,817
)
 
(9,560
)
Business acquisition, net of cash acquired

 
(156,312
)
Net cash used in investing activities
(13,736
)
 
(161,171
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of common stock under employee stock purchase and stock option plans
24,020

 
6,777

Stock repurchases

 
(12,363
)
Excess tax benefits from employee stock plans
2,827

 
2,336

Net cash provided by (used in) from financing activities
26,847

 
(3,250
)
Effect of exchange rate changes on cash and cash equivalents
29

 

Net increase (decrease) in cash and cash equivalents
53,877

 
(136,944
)
Cash and cash equivalents at beginning of period
62,313

 
191,762

Cash and cash equivalents at end of period
$
116,190

 
$
54,818

 
 
 
 
Acquisition consideration accrued but not paid
$

 
$
(1,482
)
 
The accompanying notes are an integral part of these 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
 
Description of the Company.  Omnicell, Inc. ("Omnicell," "our," "us," "we," or the "Company") 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 and supply control systems which are sold in our principal market, which is the healthcare industry. Our market is primarily located in the United States. On May 21, 2012, we completed our acquisition of MedPak Holdings, Inc. ("MedPak"). MedPak is the parent company of MTS Medication Technologies, Inc. ("MTS"), a worldwide provider of medication adherence packaging systems. This acquisition aligns us with the long-term trends of the healthcare market to manage the health of patients across the continuum of care. We now serve both the acute care and non-acute care markets. Please refer to Note 14, "Business Acquisition" for more information regarding the transaction.

Basis of presentation.  These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of Omnicell and its subsidiaries as of September 30, 2013 , the results of their operations and comprehensive income for the three and nine months ended September 30, 2013 and 2012 and their cash flows for the nine months ended September 30, 2013 and 2012 . 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 our Annual Report on Form 10-K for the year ended December 31, 2012 .
 
Our results of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2013 are not necessarily indicative of results that may be expected for the year ending December 31, 2013 , or for any future period. 

Use of estimates. GAAP requires management to make estimates and assumptions that affect the amounts reported in our 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. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, share-based compensation, inventory valuation, valuation of goodwill and purchased intangibles, valuation of long-lived assets and accounting for income taxes.
 
Principles of consolidation.  The condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Foreign currency translation. We translate the assets and liabilities of our non-U.S. dollar functional currency subsidiaries into U.S. dollars using exchange rates in effect at the end of each period. Revenue and expenses for these subsidiaries are translated using rates that approximate those in effect during the period. Gains and losses from these translations are recorded as foreign currency translation adjustments and included in accumulated other comprehensive income in stockholders’ equity.
 
Fair value of financial instruments.  We value our financial assets and liabilities on a recurring basis using the fair value hierarchy established in Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures . ASC 820 describes three levels of inputs that may be used to measure fair value, as follows:
Level 1 inputs, which include quoted prices in active markets for identical assets or liabilities;
Level 2 inputs, which include observable inputs other than Level 1 inputs, such as quoted prices for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability; and
Level 3 inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value

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measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
At September 30, 2013 and December 31, 2012 , our financial assets, measured at fair value on a recurring basis, utilizing Level 1 inputs included money market funds, classified as cash equivalents. For these items, quoted market prices are readily available and fair value approximates carrying value. We do not currently have any material financial instruments, measured at fair value on a recurring basis, utilizing Level 2 or Level 3 inputs.

Classification of marketable securities . Securities held as investments for the indefinite future, pending future spending requirements, are classified as “Available-for-sale” and are carried at their fair value, with any unrealized gain or loss recorded to other comprehensive income until realized. At September 30, 2013 and December 31, 2012 , we held $64.8 million and $38.9 million , respectively, of money market mutual funds classified as available-for-sale cash equivalents. We do not hold securities for purposes of trading.

Currency forward contracts. From time to time we enter into foreign currency forward contracts to protect our business from the risk that exchange rates may affect the eventual cash flows resulting from intercompany transactions between Omnicell and our foreign subsidiaries. These transactions primarily arise as a result of products manufactured in the U.S. and sold to foreign subsidiaries in U.S. dollars rather than the subsidiaries' functional currencies. These forward contracts are considered to be financial derivative instruments and are recorded at fair value in the balance sheet. Changes in fair value of these financial derivative instruments are either recognized in other comprehensive income (a component of stockholders' equity) or net income depending on whether the derivative has been designated and qualifies as a highly effective hedging instrument. At September 30, 2013 and December 31, 2012, we had no foreign currency forward contracts which qualify for hedge accounting.

Segment information.  Prior to the acquisition of MTS, we managed our business on the basis of a single operating segment, and a single reporting unit within that segment in accordance with ASC 280, Segment Reporting . Beginning with the acquisition of MTS in May 2012, we have organized our business into two operating business segments: Acute Care, which includes primarily products and services sold to hospital customers, and Non-Acute Care, which includes primarily products and services sold to customers outside of the hospital setting.
The Acute Care segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems. The Non-Acute Care segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services, but also includes medication dispensing systems sold to non-acute care pharmacies and facilities. We report segment information based on the management approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (the "CODM") for making decisions and assessing performance as the source of our operating segments. The CODM is our Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment, using information about its revenues, gross profit and income (loss) from operations.
Revenue recognition . We earn revenues from sales of our medication control systems together with related consumables and services, and medical/surgical supply control systems with related services, which are sold in our principal market, which is the healthcare industry. Revenues related to consumable products are reported net of discounts provided to our customers. Our customer arrangements typically include one or more of the following deliverables:
Products —Software-enabled equipment that manages and regulates the storage and dispensing of pharmaceuticals, consumable blister cards and packaging equipment and other medical supplies.
Software —Additional software applications that enable incremental functionality of our equipment.
Installation —Installation of equipment as integrated systems at customers' sites.
Post-installation technical support —Phone support, on-site service, parts and access to unspecified software upgrades and enhancements, if and when available.
Professional services —Other customer services such as training and consulting.
We recognize revenue when the earnings process is complete, based upon our evaluation of whether the following four criteria have been met:
Persuasive evidence of an arrangement exists.  We use signed customer contracts and signed customer purchase orders as evidence of an arrangement for equipment leases and sales. For service engagements, we use a signed services agreement and a statement of work to evidence an arrangement.

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Delivery has occurred.  Equipment and software product delivery is deemed to occur upon successful installation and receipt of a signed and dated customer confirmation of installation letter, providing evidence that we have delivered what a customer ordered. In instances of a customer self-installed installation, product delivery is deemed to have occurred upon receipt of a signed and dated customer confirmation letter. If a sale does not require installation, we recognize revenue on delivery of products to the customer, including transfer of title and risk of loss, assuming all other revenue criteria are met. We recognize revenue from sales of products to distributors upon delivery, when no contractual obligations for installation exists, assuming all other revenue criteria are met since we do not allow for rights of return or refund. For sales to distributors where we assume contractual installation obligations or new distributors whom we have not fully trained to install our products, the equipment and software product delivery is deemed to occur upon successful installation and receipt of a signed and dated customer confirmation of installation letter. For the sale of consumable blister cards, we recognize revenue when title and risk of loss of the products shipped have transferred to the customer, which usually occurs upon shipment from our facilities. Assuming all other revenue criteria are met, we recognize revenue for support services ratably over the related support services contract period, and we recognize revenue on training and professional services as those services are performed.
Fee is fixed or determinable.  We assess whether a fee is fixed or determinable at the outset of the arrangement based on the payment terms associated with the transaction. We have established a history of collecting under the original contract without providing concessions on payments, products or services.
Collection is probable.  We assess the probability of collecting from each customer at the outset of the arrangement based on a number of factors, including the customer's payment history and its current creditworthiness. If, in our judgment, collection of a fee is not probable, we defer the revenue until the uncertainty is removed, which generally means revenue is recognized upon our receipt of cash payment assuming all other revenue criteria are met. Our historical experience has been that collection from our customers is generally probable.
In arrangements with multiple deliverables, assuming all other revenue criteria are met, we recognize revenue for individual delivered items if they have value to the customer on a standalone basis. We allocate arrangement consideration at the inception of the arrangement to all deliverables using the relative selling price method. This method requires us to determine the selling price at which each deliverable could be sold if it were sold regularly on a standalone basis. When available, we use vendor-specific objective evidence ("VSOE") of fair value as the selling price. VSOE represents the price charged for a deliverable when it is sold separately or for a deliverable not yet being sold separately, the price established by management with the relevant authority. We consider VSOE to exist when approximately 80% or more of our standalone sales of an item are priced within a reasonably narrow pricing range (plus or minus 15% of the median rates). We have established VSOE of fair value for our post-installation technical support services and professional services. When VSOE of fair value is not available, third-party evidence ("TPE") of fair value for similar products and services is acceptable; however, our offerings and market strategy differ from those of our competitors, such that we cannot obtain sufficient comparable information about third parties' prices. If neither VSOE nor TPE are available, we use our best estimates of selling prices ("BESP"). We determine BESP considering factors such as market conditions, sales channels, internal costs and product margin objectives and pricing practices. We regularly review and update our VSOE, TPE and BESP information and obtain formal approval by appropriate levels of management.
The relative selling price method allocates total arrangement consideration proportionally to each deliverable on the basis of its estimated selling price. In addition, the amount recognized for any delivered items cannot exceed that which is not contingent upon delivery of any remaining items in the arrangement.
We also use the residual method of allocating the arrangement consideration in certain circumstances. We use the residual method to allocate total arrangement consideration between delivered and undelivered items for any arrangements entered into prior to January 1, 2011 and not subsequently materially-modified. The use of the residual method is required by software revenue recognition rules that applied to sales of most of our products and services until the adoption of the new revenue recognition guidance. We also use the residual method to allocate revenue between the software products that enable incremental equipment functionality and thus are not deemed to deliver its essential functionality, and the related post-installation technical support, as these products and services continue to be accounted for under software revenue recognition rules. Under the residual method, the amount allocated to the undelivered elements equals VSOE of fair value of these elements. Any remaining amounts are attributed to the delivered items and are recognized when those items are delivered.
A portion of our sales are made through multi-year lease agreements. Under sales-type leases, we recognize revenue for our hardware and software products net of lease execution costs, such as post-installation product maintenance and technical support, at the net present value of the lease payment stream once our installation obligations have been met. We optimize cash flows by selling a majority of our non-U.S. government leases to third-party leasing finance companies on a non-

9


recourse basis. We have no obligation to the leasing company once the lease has been sold. Some of our sales-type leases, mostly those relating to U.S. government hospitals, are retained in-house. Interest income in these leases is recognized in product revenue using the effective interest method.
Accounts receivable and notes receivable (net investment in sales type leases). We actively manage our accounts receivable to minimize credit risk. We typically sell to customers for which there is a history of successful collection. New customers are subject to a credit review process, which evaluates that customer's financial position and ability to pay. We continually monitor and evaluate the collectability of our trade receivables based on a combination of factors. We record specific allowances for doubtful accounts when we become aware of a specific customer's impaired ability to meet its financial obligation to us, such as in the case of bankruptcy filings or deterioration of financial position. Uncollectible amounts are charged off against trade receivables and the allowance for doubtful accounts when we make a final determination that there is no reasonable expectation of recovery. Estimates are used in determining our allowances for all other customers based on factors such as current trends, the length of time the receivables are past due and historical collection experience. While we believe that our allowance for doubtful accounts receivable is adequate and that the judgment applied is appropriate, such estimated amounts could differ materially from what will actually be uncollectible in the future.
The retained in-house leases discussed above are considered financing receivables. Our credit policies and evaluation of credit risk and write-off policies are applied alike to trade receivables and the net-investment in sales-type leases. For both, an account is generally past due after thirty days. The financing receivables also have customer-specific reserves for accounts identified for specific impairment and a non-specific reserve applied to the remaining population, based on factors such as current trends, the length of time the receivables are past due and historical collection experience. The retained in-house leases are not stratified by portfolio or class. Financing receivables which are reserved are generally transferred to cash-basis accounting so that revenue is recognized only as cash is received. However, the cash basis accounts continue to accrue interest.
Sales of accounts receivable.  We record the sale of our accounts receivables as “true sales” in accordance with accounting guidance for transfers and servicing of financial assets. During the three months ended September 30, 2013 and 2012 , we transferred non-recourse accounts receivable totaling $7.2 million and $14.6 million , respectively, which approximated fair value, to third-party leasing companies. During the nine months ended September 30, 2013 and 2012 , we transferred non-recourse accounts receivable totaling $28.1 million and $42.5 million , respectively, which approximated fair value, to third-party leasing companies. At September 30, 2013 and December 31, 2012 , accounts receivable included $0.5 million and $0.7 million , respectively, due from third-party leasing companies for transferred non-recourse accounts receivable.
 
Concentration in revenues and in accounts receivable.  There was no single customer accounting for 10% or more of revenues in the three and nine months ended September 30, 2013. Additionally, there was no single customer accounting for 10% or more of accounts receivable at September 30, 2013 or December 31, 2012 . At September 30, 2013 , we believe that we have no significant concentrations of credit risk.
 
Accounting policy for shipping costs. Outbound freight billed to customers is recorded as product revenue. The related shipping and handling cost is expensed as part of selling, general and administrative expense. Such shipping and handling expenses totaled $1.5 million and $1.2 million for the three months ended September 30, 2013 and 2012 , respectively. Shipping and handling expenses totaled $4.5 million and $2.7 million for the nine months ended September 30, 2013 and 2012 , respectively.

Dependence on suppliers.  We have a supply agreement with one primary supplier for construction and supply of several sub-assemblies and inventory management of sub-assemblies used in our hardware products. There are no minimum purchase requirements. The contract may be terminated by either the supplier or by us without cause and at any time upon delivery of two months’ notice. Purchases from this supplier for the three months ended September 30, 2013 and 2012 totaled approximately $8.6 million and $6.3 million , respectively. Purchases from this supplier for the nine months ended September 30, 2013 and 2012 totaled approximately $22.5 million and $17.8 million , respectively.

Income taxes. We record an income tax provision for the anticipated tax consequences of the reported results of operations. In accordance with GAAP, the provision for income taxes is computed using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and for operating losses and tax credit carry forwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply in the periods in which those tax assets and liabilities are expected to be realized. In the event that we determine all or part of the net deferred tax assets are not realizable in the future, we will record a valuation allowance that would be charged to earnings in the period such determination is made.
 

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In accordance with ASC 740, Tax Provisions , we recognize the tax benefit from an uncertain tax position if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The calculation of tax liabilities involves significant judgment in estimating the impact of uncertainties in the application of GAAP and complex tax laws. Resolution of these uncertainties in a manner inconsistent with management’s expectations could have a material impact on our financial condition and operating results.
 
We provide 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 38.1% and 41.5% for the nine months ended September 30, 2013 and 2012 , respectively. The 2013 annual effective tax rate differed from the statutory rate of 35.0% primarily due to the unfavorable impact of state income taxes, non-deductible equity charges, and other non-deductible expenditures, which were partially offset by the federal research and development credit claimed and the domestic production activities deduction.

The 2012 annual effective tax rate differed from the statutory rate of 35.0% primarily due to the unfavorable impact of state income taxes, non-deductible equity charges, and other non-deductible expenditures, which were partially offset by the domestic production activities deduction.

Recently Adopted Accounting Standards
In February 2013, the Financial Accounting Standards Board ("FASB") issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (AOCI), which aims to improve the reporting of reclassifications out of AOCI. This update requires an entity to report the effect of significant reclassifications out of AOCI on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments do not change the current requirements for reporting net income or other comprehensive income in financial statements. For public entities, the amendments are effective prospectively for reporting periods beginning after December 15, 2012. We adopted this guidance in the first quarter of 2013. This update did not have any significant impact on our financial position, operating results or cash flows.
Note 2.
Net Income Per Share
 
Basic net income per share is computed by dividing net income for the period by the weighted average number of shares outstanding during the period, less shares subject to repurchase. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares, less shares subject to repurchase, plus, if 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. Since their impact is anti-dilutive, we excluded 1,178,755 and 2,067,273 shares from the calculations of diluted net income per share for the nine months ended September 30, 2013 and 2012 , respectively.
 

11


The calculation of basic and diluted net income per share is as follows (in thousands, except per share amounts):
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2013
 
2012
2013
 
2012
Basic:
 

 
 

 

 
 

Net income
$
7,755

 
$
6,920

$
17,156

 
$
10,646

Weighted average shares outstanding — basic
35,133

 
33,193

34,499

 
33,316

Net income per share — basic
$
0.22

 
$
0.21

$
0.50

 
$
0.32

Diluted:
 

 
 

 

 
 

Net income
$
7,755

 
$
6,920

$
17,156

 
$
10,646

Weighted average shares outstanding — basic
35,133

 
33,193

34,499

 
33,316

Add: Dilutive effect of employee stock plans
1,057

 
875

967

 
925

Weighted average shares outstanding — diluted
36,190

 
34,068

35,466

 
34,241

Net income per share — diluted
$
0.21

 
$
0.20

$
0.48

 
$
0.31


Note 3.
Cash and Cash Equivalents and Fair Value of Financial Instruments
 
Cash and cash equivalents consist of the following significant investment asset classes, with disclosure of amortized cost, gross unrealized gains and losses and fair value as of September 30, 2013 and December 31, 2012 (in thousands):

 
September 30, 2013
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Cash / Cash
Equivalents
 
Security
Classification
Cash
$
51,415

 
$

 
$

 
$
51,415

 
$
51,415

 
N/A
Money market fund
64,775

 

 

 
64,775

 
64,775

 
Available for sale
Total cash and cash equivalents
$
116,190

 
$

 
$

 
$
116,190

 
$
116,190

 
 

c
December 31, 2012
 
 
Amortized
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Value
 
Cash / Cash
Equivalents
 
Security
Classification
Cash
$
23,422

 
$

 
$

 
$
23,422

 
$
23,422

 
N/A
Money market fund
38,892

 

 
1

 
38,891

 
38,891

 
Available for sale
Total cash and cash equivalents
$
62,314

 
$

 
$
1

 
$
62,313

 
$
62,313

 
 
 
The money market fund is a daily-traded cash equivalent with a price of $1.00 , making it a Level 1 asset class, and its carrying cost closely approximates fair value. As demand deposit (cash) balances vary with the timing of collections and payments, the money market fund can cover any surplus or deficit, and thus is considered Available-for-sale.

12


The following table displays the financial assets measured at fair value, on a recurring basis, with money market funds recorded within cash and cash equivalents (in thousands):
 
Quoted Prices in Active
Markets for Identical
Instruments
  (Level 1)
 
Significant Other
  Observable Inputs
  (Level 2)
 
Significant
  Unobservable
Inputs
(Level 3)
 
Total Fair
Value
At September 30, 2013
 

 
 

 
 

 
 

Money market fund
$
64,775

 
$

 
$

 
$
64,775

Total
$
64,775

 
$

 
$

 
$
64,775

At December 31, 2012
 

 
 

 
 

 
 

Money market fund
$
38,891

 
$

 
$

 
$
38,891

Total
$
38,891

 
$

 
$

 
$
38,891


Current assets and current liabilities are recorded at amortized cost, which approximates fair value due to the short-term maturities implied.

Note 4.
Inventories
 
Inventories consist of the following (in thousands):
 
September 30,
2013
December 31,
2012
Raw materials
$
11,120

$
9,994

Work in process
963

385

Finished goods
18,622

16,524

Total
$
30,705

$
26,903


Note 5.
Property and Equipment
 
Property and equipment consist of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
Equipment
$
35,483

 
$
32,528

Furniture and fixtures
5,149

 
5,126

Leasehold improvements
7,356

 
6,992

Purchased software
19,800

 
19,870

Capital in process
3,491

 
2,693

 
71,279

 
67,209

Accumulated depreciation and amortization
(37,787
)
 
(33,102
)
Property and equipment, net
$
33,492


$
34,107

 
Depreciation and amortization of property and equipment totaled approximately $2.6 million and $2.2 million for the three months ended September 30, 2013 and 2012 , respectively. Depreciation and amortization of property and equipment totaled approximately $8.2 million and $5.7 million for the nine months ended September 30, 2013 and 2012 , respectively.

13


Note 6.
Net Investment in Sales-Type Leases
 
Our sales-type leases are for terms generally up to five years. Sales-type lease receivables are collateralized by the underlying equipment. The components of our net investment in sales-type leases are as follows (in thousands):
 
September 30,
2013
 
December 31,
2012
Net minimum lease payments to be received
$
18,788

 
$
19,665

Less unearned interest income portion
1,157

 
1,205

Net investment in sales-type leases
17,631

 
18,460

Less current portion(1)
5,233

 
5,232

Non-current net investment in sales-type leases(2)
$
12,398

 
$
13,228

 
 
 
 
 
(1)      A component of other current assets. This amount is net of allowance for doubtful accounts of $0.1 million as of September 30, 2013 and $0.5 million as of December 31, 2012 .
(2)      This amount is net of allowance for doubtful accounts of $0.1 million as of September 30, 2013 and $0.1 million as of December 31, 2012 .

The minimum lease payments under sales-type leases as of September 30, 2013 were as follows (in thousands):
2013 (remaining three months)
$
1,640

2014
5,495

2015
4,536

2016
3,341

2017
2,603

Thereafter
1,173

Total
$
18,788


The following table summarizes the credit losses and recorded investment in sales-type leases, excluding unearned interest (in thousands):
 
Allowance for Credit Losses
 
Recorded Investment
in Sales-type Leases Gross
 
Recorded Investment
in Sales-type Leases Net
Credit loss disclosure for September 30, 2013:
 

 
 

 
 

Accounts individually evaluated for impairment
$
22

 
$
22

 
$

Accounts collectively evaluated for impairment
152

 
17,783

 
17,631

Ending balances: September 30, 2013
$
174

 
$
17,805

 
$
17,631

Credit loss disclosure for December 31, 2012:
 

 
 

 
 

Accounts individually evaluated for impairment
$
489

 
$
489

 
$

Accounts collectively evaluated for impairment
118

 
18,578

 
18,460

Ending balances: December 31, 2012
$
607

 
$
19,067

 
$
18,460

 

14


The following table summarizes the activity for the allowance for credit losses for the investment in sales-type leases for the three and nine months ended September 30, 2013 and 2012 (in thousands):
 
Three Months Ended September 30,
Nine Months Ended September 30,

2013
 
2012
2013
 
2012
Allowance for credit losses, beginning of period
$
184

 
$
659

$
607

 
$
284

Current period provision
15

 
4

34

 
426

Direct write-downs charged against the allowance

 

(413
)
 

Recoveries of amounts previously charged off
(25
)
 
(26
)
(54
)
 
(73
)
Allowance for credit losses, end of period
$
174


$
637

$
174

 
$
637

 
Note 7.
Goodwill and Other Intangible Assets

Under ASC 350, Intangibles—Goodwill and Other , goodwill is not subject to amortization. We evaluate goodwill for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.
Activity in goodwill by reporting unit, which is the same for our operating segments, for the nine months ended September 30, 2013 consists of the following (in thousands):
 
Goodwill at December 31, 2012
 
Adjustments to Goodwill
 
Goodwill at September 30, 2013
Reporting units:
 
 
 
 
 
Acute Care
$
28,543

 
$

 
$
28,543

Non-Acute Care
82,864

 
(64
)
 
82,800

Total
$
111,407

 
$
(64
)
 
$
111,343


Goodwill acquired reflects the May 21, 2012 acquisition of MedPak by Omnicell. MedPak is the parent company of MTS, a worldwide provider of medication adherence packaging systems. The acquired goodwill was assigned to our new reporting unit called Non-Acute Care, created as a result of the MTS acquisition. During the first quarter of 2013, we reduced goodwill by approximately $0.1 million due to the adjustment to the fair value of an acquired foreign currency forward contract previously carried in a component of stockholder's equity.

There were no indefinite-life intangibles at either September 30, 2013 or December 31, 2012 . Finite-life intangible assets consist of the following (in thousands):
 
September 30, 2013
 
December 31, 2012
 
 
 
Gross
 
 
 
Net
 
Gross
 
 
 
Net
 
 
 
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
 
Carrying
Amount
 
Accumulated
Amortization
 
Carrying
Amount
 
Amortization
Life
Finite-lived intangibles:
 

 
 

 
 

 
 

 
 

 
 

 
 
Customer relationships
$
54,730

 
$
4,698

 
$
50,032

 
$
54,730

 
$
3,081

 
$
51,649

 
5-30 years
Acquired technology
27,580

 
2,230

 
25,350

 
27,580

 
1,128

 
26,452

 
3-20 years
Patents
1,363

 
244

 
1,119

 
1,217

 
259

 
958

 
20 years
Trade name
6,890

 
861

 
6,029

 
6,890

 
414

 
6,476

 
3-12 years
Non-compete agreements
60

 
60

 

 
60

 
45

 
15

 
3 years
Total finite-lived intangibles
$
90,623

 
$
8,093

 
$
82,530

 
$
90,477

 
$
4,927

 
$
85,550

 
 
 
Amortization expense totaled $1.1 million and $1.1 million for the three months ended September 30, 2013 and 2012 , respectively. Amortization expense totaled $3.2 million and $1.8 million for the nine months ended September 30, 2013 and 2012 , respectively. The amortization of acquired technology is included within product cost of sales; other acquired intangibles are usually amortized within selling, general and administrative expenses.

Estimated annual expected amortization expense of the finite-lived intangible assets at September 30, 2013 was as follows (in thousands):
2013 (remaining three months)
$
1,059

2014
4,229

2015
4,204

2016
3,854

2017
3,818

2018
3,711

Thereafter
61,655

Total
$
82,530


15



Note 8.
Accrued Liabilities
 
Accrued liabilities consist of the following (in thousands):
 
September 30,
2013
December 31,
2012
Rebates and lease buyouts
$
3,379

$
3,179

Advance payments from customers
4,272

2,829

Accrued Group Purchasing Organization (GPO) fees
2,492

2,278

Technology license purchase obligation, current portion
1,500

1,750

Taxes payable (receivable)
774

555

Other
1,602

1,397

Total
$
14,019

$
11,988

 

Note 9.
Deferred Gross Profit
 
Deferred gross profit consists of the following (in thousands):
 
September 30,
2013
 
December 31,
2012
Sales of medication and supply dispensing systems and packaging equipment, which have been delivered and invoiced but not yet installed
$
40,919

 
$
30,138

Cost of revenues, excluding installation costs
(15,713
)
 
(9,366
)
Deferred gross profit
$
25,206

 
$
20,772


Note 10.
Commitments

At September 30, 2013 , the minimum payments under our operating leases for each of the five succeeding fiscal years were as follows (in thousands):
2013 (remaining three months)
$
1,462

2014
5,722

2015
5,476

2016
5,150

2017
4,468

2018
4,298

Thereafter
16,600

Total
$
43,176

 
 In October 2011 , we entered into a lease agreement for approximately 100,000 square feet of office space. Pursuant to the lease agreement, the landlord constructed a single, three-story building of rentable space in Mountain View, California which we now lease and which serves as our headquarters. The term of the lease agreement, which commenced in November 2012, is for a period of 10 years , with a base lease commitment of approximately $40.0 million . We have two options to extend the term of the lease agreement at market rates. Each extension is for an additional 60 month term.
In March 2012 , we entered into a lease agreement for approximately 46,000 square feet of manufacturing, distribution and office space located in Milpitas, California which commenced in October, 2012. The term of the lease agreement is for a period of 60 months , with a base lease commitment of approximately $1.8 million and a single 60 month extension option.
In connection with the acquisition of MTS, we assumed responsibility for 132,500 square feet of manufacturing, warehousing and office space in St. Petersburg, Florida. The remaining term of the original lease agreement was for a period of 12 years , which expires in September 2016 and at the time of the MTS acquisition, with a base lease commitment of approximately $3.9 million . We have two options to extend the term of the lease agreement at market rates. Each extension is for an additional 60 month term.
In Leeds, United Kingdom, we lease an office and distribution center of approximately 16,500 square feet. The remaining term of the original ten year lease agreement is through June 8, 2021 , with no extension options. The base lease

16


commitment at the time of the MTS acquisition, converted from British Pounds at the conversion rate then in effect, was approximately $1.2 million .
We also have smaller rented offices in Strongsville, Ohio, Nashville, Tennessee, Waukegan, Illinois, the United Arab Emirates, the People's Republic of China and the Federal Republic of Germany.
We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. Our near-term commitments to our contract manufacturers and suppliers totaled $7.5 million as of September 30, 2013 .
At September 30, 2013 , we have recorded $4.7 million for uncertain tax positions under long term liabilities in accordance with GAAP, summarized under Note 1, “Organization and Summary of Significant Accounting Policies.” As these liabilities do not reflect actual tax assessments, the timing and amount of payments we might be required to make will depend upon a number of factors. Accordingly, as the timing and amount of payment cannot be estimated, we do not present this in a commitments table.
Note 11.
Contingencies
 
Legal Proceedings    

On March 8, 2013, Bobbi Polanco (“Polanco”) filed a putative class action complaint in the United States District Court for the District of New Jersey against Omnicell and certain of our customers (Case No. 1:13-cv-01417-NLH-KLM) alleging breach of state security notification laws, violations of state consumer fraud laws, fraud, negligence and conspiracy relating to the theft of an Omnicell electronic device containing medication dispensing cabinet log files, including certain patient health information, and subsequent notification of this unauthorized disclosure of personal health information. Polanco is seeking an injunction against the defendants to prevent each of them from committing the acts complained of in the future and monetary damages, costs and expenses. On May 2, 2013, the United States District Court for the District of New Jersey entered an order to show cause which provided, in relevant part, that Polanco is required to show cause as to why the case should not be dismissed for lack of subject matter jurisdiction. On May 13, 2013, Polanco filed an amended complaint. On May 31, 2013, Omnicell filed a motion to dismiss the complaint on the grounds that Polanco failed to satisfy constitutional standing requirements and that she failed to state a claim against Omnicell  for violating  state data breach notification statutes, consumer fraud, common law fraud, negligence and conspiracy. Omnicell also joined in the arguments of the other defendants seeking dismissal. On July 1, 2013, Polanco filed an opposition to the motions to dismiss. On July 15, 2013, Omnicell filed its reply to the opposition from Polanco. Omnicell is currently awaiting a decision from the court and intends to defend the matter vigorously.
As required under ASC 450, Contingencies , we accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. We have not recorded any accrual for contingent liabilities associated with the legal proceedings described above based on our 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. We believe that we have valid defenses with respect to legal proceedings pending against us. 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.
Guarantees
As permitted under Delaware law and our certificate of incorporation and bylaws, we have agreed to indemnify our directors and officers against certain losses that they may suffer by reason of the fact that such persons are, were or become our directors or officers. The term of the indemnification period is for the director’s or officer’s lifetime and there is no limit on the potential amount of future payments that we could be required to make under these indemnification agreements. We have purchased a directors’ and officers’ liability insurance policy that may enable us to recover a portion of any future payments that we may be required to make under these indemnification agreements. Assuming the applicability of coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, we believe it is unlikely that we will be required to pay any material amounts pursuant to these indemnification obligations. However, no assurances can be given that the insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers.
Additionally, we undertake indemnification obligations in our ordinary course of business in connection with, among other things, the licensing of our products and the provision of our support services. In the ordinary course of our business, we

17


have in the past and may in the future agree to indemnify another party, generally our business affiliates or customers, against certain losses suffered or incurred by the indemnified party in connection with various types of claims, which may include, without limitation, claims of intellectual property infringement, certain tax liabilities, our gross negligence or intentional acts in the performance of support services and violations of laws. The term of these indemnification obligations is generally perpetual. In general, we attempt to limit the maximum potential amount of future payments that we may be required to make under these indemnification obligations to the amounts paid to us by a customer, but in some cases the obligation may not be so limited. In addition, we have in the past and may in the future warrant to our customers that our products will conform to functional specifications for a limited period of time following the date of installation (generally not exceeding 30 days) or that our software media is free from material defects. Sales contracts for certain of our medication packaging systems often include limited warranties for up to six months, but the periodic activity and ending warranty balances we record have historically been immaterial.
From time to time, we may also warrant that our professional services will be performed in a good and workmanlike manner or in a professional manner consistent with industry standards. We generally seek to disclaim most warranties, including any implied or statutory warranties such as warranties of merchantability, fitness for a particular purpose, title, quality and non-infringement, as well as any liability with respect to incidental, consequential, special, exemplary, punitive or similar damages. In some states, such disclaimers may not be enforceable. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. We have not been subject to any significant claims for such losses and have not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, we believe it is unlikely that we will be required to pay any material amounts pursuant to these indemnification obligations or potential warranty claims and, therefore, no material liabilities have been recorded for such indemnification obligations as of September 30, 2013 or December 31, 2012 .
Note 12.
Stockholders’ Equity
 
Treasury Stock
 
2008 Stock Repurchase Program

In February 2008, our Board of Directors authorized a stock repurchase program (the “2008 Repurchase Program”) for the repurchase of up to $90.0 million of our common stock. The timing, price and volume of the repurchases have been based on market conditions, relevant securities laws and other factors.

There were no shares repurchased during both the three and nine months ended September 30, 2013 under the 2008 Repurchase Program. During the three months ended September 30, 2012 , we repurchased 393,031 shares through the 2008 Repurchase Program at an average cost of $13.49 per share, including commissions, compared to 505,137 shares repurchased in the three months ended June 30, 2012 at an average cost of $13.98 per share, including commissions. For the nine months ended September 30, 2012, we repurchased 898,168 shares at an average cost of 13.76 per share, including commissions.
 
From the inception of the 2008 Repurchase Program in February 2008 through September 30, 2013 , we have repurchased a total of 5,853,975 shares at an average cost of $15.37 per share through open market purchases. As of September 30, 2013, we have completed the 2008 Repurchase Program having repurchased $90.0 million of our common stock.

2012 Stock Repurchase Program

On August 1, 2012, our Board of Directors established a new stock repurchase program (the “2012 Repurchase Program”) authorizing share repurchases of up to $50.0 million of our common stock, with no termination date. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The stock repurchases may be made from time to time on the open market, in privately negotiated transactions or pursuant to a Rule 10b-18 plan. The stock repurchase program does not obligate Omnicell to repurchase any specific number of shares, and Omnicell may terminate or suspend the repurchase program at any time.

Through September 30, 2013 , we have not repurchased any shares through the 2012 Repurchase Program.

Note 13.
Stock Option Plans and Share-Based Compensation
 
Stock Option Plans
Description of Share-Based Plans

18


Equity Incentive Plan
On May 19, 2009 , at our 2009 Annual Meeting of Stockholders (the "2009 Annual Meeting") our stockholders approved the Omnicell, Inc. 2009 Equity Incentive Plan (the "2009 Plan") which authorized 2,100,000 shares to be issued. The 2009 Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards to our employees, directors and consultants.
The 2009 Plan succeeded the 1999 Equity Incentive Plan, as amended, the 2003 Equity Incentive Plan, as amended, and the 2004 Equity Incentive Plan (collectively, the "Prior Plans"). No additional awards will be granted under any of the Prior Plans; however, all outstanding stock awards granted under the Prior Plans continue to be subject to the terms and conditions as set forth in the agreements evidencing such stock awards. For purposes of determining future common shares available for grant, for each share granted as a full-value award, including restricted stock and restricted stock units ("RSUs") performance stock awards, the shares available for grant were reduced by 1.4 shares. Equity awards granted as stock options and stock appreciation rights reduce the shares available for grant by one share.
On December 16, 2010 , at a Special Meeting of Stockholders, our stockholders approved an amendment to increase the number of shares of common stock authorized for issuance under the 2009 Plan by 2,600,000 shares and to provide that the number of common stock shares available for issuance under the 2009 Plan be reduced by 1.8 shares for each share granted as a full-value award granted on and after October 1, 2010 . For each share granted as a full-value award granted prior to October 1, 2010 , future shares available for grants under the 2009 Plan were reduced by 1.4 shares. Awards granted as stock options and stock appreciation rights continue to reduce the number of shares available for issuance under the 2009 Plan on a one-for-one basis. On May 21, 2013, at our Annual Meeting of Stockholders, our stockholders approved an amendment to increase the number of shares of common stock authorized for issuance under the 2009 Plan by 2,500,000 shares.
Options granted under the 2009 Plan generally become exercisable over periods of up to 4 years , generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter; however our board of directors may impose different vesting terms at its discretion on any award. Options under the 2009 Plan generally expire 10 years from the date of grant. We also grant both restricted stock and restricted stock units to participants under the 2009 Plan. The Board of Directors determines the award amount, the vesting provisions and the expiration period (not to exceed ten years) for each grant. Grants of restricted stock to non-employee directors are granted on the date of our annual meeting of stockholders and vest in full on the date of our next annual meeting of stockholders, provided such non-employee director remains a director on such date. The fair value of the stock on the date of issuance is amortized to expense from the date of grant to the date of vesting. RSUs granted to employees generally vest over a period of four years and are expensed ratably on a straight-line basis over the vesting period. We consider the dilutive impact of options, restricted stock and restricted stock units in our diluted net income per share calculation.
The Board of Directors shall administer the 2009 Plan unless and until the Board of Directors delegates administration to a committee. Our Board of Directors has delegated administration of the 2009 Plan to the Compensation Committee of the Board of Directors and the 2009 Plan is generally administered by such committee. The Board of Directors may suspend or terminate the 2009 Plan at any time. The Board of Directors may also amend the 2009 Plan at any time or from time to time. However, no amendment will be effective unless approved by our stockholders after its adoption by our Board of Directors to the extent stockholder approval is necessary to satisfy the applicable listing requirements of NASDAQ.
If we sell, lease or dispose of all or substantially all of our assets, or we are acquired pursuant to a merger or consolidation, then the surviving entity may assume or substitute all outstanding awards under the 2009 Plan. If the surviving entity does not assume or substitute these awards, then generally the stock awards will immediately and fully vest.
At September 30, 2013 , a total of 3,353,608 shares of common stock were reserved for future issuance under the 2009 Plan. At September 30, 2013 , $6.0 million of total unrecognized compensation cost related to non-vested stock options was expected to be recognized over a weighted average period of 2.6 years .
 
A summary of aggregate option activity for the nine months ended September 30, 2013 is presented below:

19


Options:
 
Number of Shares
 
Weighted-
  Average
  Exercise Price
 
 
(in thousands)
 
 
Outstanding at December 31, 2012
 
4,470

 
$
14.06

Granted
 
296

 
$
18.10

Exercised
 
(1,450
)
 
$
12.59

Forfeited
 
(75
)
 
$
14.40

Expired
 
(56
)
 
$
15.68

Outstanding at September 30, 2013
 
3,185

 
$
15.07

Exercisable at September 30, 2013
 
2,186

 
$
14.85

 
Restricted Stock and Time-based Restricted Stock Units
 
The non-employee members of our Board of Directors are granted restricted stock on the day of our annual meeting of stockholders and such shares of restricted stock vest on the date of the subsequent year’s annual meeting of stockholders, provided such non-employee director remains a director on such date. 

Restricted stock units (“RSUs”) are granted to certain of our employees and generally vest over a period of four years and are expensed ratably on a straight-line basis over the vesting period. The fair value of both restricted stock and RSUs granted pursuant to our stock option plans is the product of the number of shares granted and the grant date fair value of our common stock. Our unrecognized compensation cost related to non-vested restricted stock at September 30, 2013 was approximately $0.6 million and is expected to be recognized over a weighted-average period of 0.6 years . Expected future compensation expense relating to RSUs outstanding on September 30, 2013 is $4.8 million over a weighted-average period of 2.2 years .
 
A summary of activity of both restricted stock and RSUs for the nine months ended September 30, 2013 is presented below:
 
Restricted Stock
 
Restricted Stock Units
 
Number of
Shares
 
Weighted-Average
Grant Date
Fair Value Per
Share
 
Number of
Shares
 
Weighted-Average
Grant Date
Fair Value Per
Share
 
(in thousands)
 
 
 
(in thousands)
 
 
Non-vested, December 31, 2012
58

 
$
14.19

 
389

 
$
14.09

Granted
55

 
$
18.20

 
125

 
$
18.12

Vested
(61
)
 
$
14.23

 
(98
)
 
$
13.90

Forfeited

 
$

 
(21
)
 
$
14.07

Non-vested, September 30, 2013
52

 
$
18.43

 
395

 
$
15.41

Performance-Based Restricted Stock Units
In 2011, we began incorporating performance-based restricted stock units ("PSUs") as an element of our executive compensation plans. For 2011, we granted 100,000 PSUs; however, pursuant to their terms, 120,000 PSUs ultimately became eligible for vesting based on the achievement of a certain level of shareholder return for 2011 as described below. In 2012, we granted 125,000 PSUs of which 62,500 became eligible for vesting based on the achievement of a certain level of stockholder return for 2012 as described below.
Our unrecognized compensation cost related to non-vested performance-based restricted stock units at September 30, 2013 was approximately $1.5 million and is expected to be recognized over a weighted-average period of 1.3 years . For the three months ended September 30, 2013 and 2012, we recognized $0.4 million and $0.2 million , respectively, of compensation expense for the performance-based restricted stock units. For the nine months ended September 30, 2013 and 2012, we recognized $1.2 million and $0.8 million , respectively, of compensation expense for the performance-based restricted stock units.
The accounting guidance for awards with market conditions differs from that for awards with service conditions only or service and performance conditions. Because the grant date fair value of an award containing market conditions is calculated

20


as the expected value, averaging over all possible outcomes, the measured expense is amortized over the service period, regardless of whether the market condition is ever actually met.
The fair value of a PSU award is the average of trial-specific values of the award over each of one million Monte Carlo trials. Each trial-specific value is the market value of the award at the end of the one-year performance period discounted back to the grant date. The market value of the award for each trial at the end of the performance period is the product of (a) the per share value of Omnicell stock at the end of the performance period and (b) the number of shares that vest. The number of shares that vest at the end of the performance period depends on the percentile ranking of the total stockholder return for Omnicell stock over the performance period relative to the total stockholder return of each of the other companies in the NASDAQ Healthcare Index (the "Index") as shown in the tables below.
Vesting for the PSU awards is based on the percentile placement of our total stockholder return among the companies listed in the Index and time-based vesting. We calculate total stockholder return based on the one year annualized rates of return reflecting price appreciation plus reinvestment of dividends. For PSU awards granted on February 5, 2013 and on March 5, 2013, stock price appreciation is calculated based on the average closing prices of our common stock for the last 20 trading days leading to February 28, 2014. For PSU awards granted in 2011 and 2012, stock price appreciation is calculated based on the average closing prices of the applicable company's common stock for the 20 trading days ending on the last trading day of the year prior to the date of grant as compared to the average closing prices for the 20 trading days ended on the last trading day of the year of grant.
The following table shows the percent of PSUs granted in 2011 and eligible for further time-based vesting based on our percentile placement:
Percentile Placement of Our Total Stockholder Return
 
% of PSUs Eligible for Time-
Based Vesting
Below the 35th percentile
 
—%
At least the 35th percentile, but below the 50th percentile
 
50%
At least the 50th percentile, but below the 65th percentile
 
100%
At least the 65th percentile, but below the 75th percentile (1)
 
110% to 119%
At or above the 75th percentile
 
120%
(1)                 The actual percentage of PSUs eligible for further time-based vesting is based on straight-line interpolation, where, for example, if the ranking is the 70 th  percentile, then the vesting percentage is 115% .
On January 17, 2012, the Compensation Committee of our Board of Directors confirmed 76.3% as the percentile rank of Omnicell’s 2011 total stockholder return. This resulted in 120% of the 2011 PSU awards, or 120,000 shares, becoming eligible for further time-based vesting. The eligible PSU awards will vest as follows: 25% of the eligible awards for the first year vested immediately on January 17, 2012 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service. Of the 120,000 shares eligible for time-based vesting under the 2011 PSU awards, 10,000 shares vested during the year ended December 31, 2012.
The following table shows the percent of PSUs granted in 2012 eligible for further time-based vesting based on our percentile placement:
Percentile Placement of Our Total Shareholder Return
% of PSUs Eligible for Time-
Based Vesting
Below the 35th percentile
—%
At least the 35th percentile, but below the 50th percentile
50%
At least the 50th percentile
100%
On January 22, 2013, the Compensation Committee of our Board of Directors confirmed 35.3% as the percentile rank of Omnicell's 2012 total stockholder return. This resulted in 50% of the 2012 PSU awards, or 62,500 shares, as eligible for further time-based vesting. The eligible performance-based restricted stock unit awards will vest as follows: 25% of the eligible shares vested immediately on January 22, 2013 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service.


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Table of Contents

On February 5 and March 5 2013, the Compensation Committee approved PSU awards of 125,000 shares and 12,500 shares, respectively. If the minimum performance threshold is met as determined by the Compensation Committee of the Board of Directors in 2014, the eligible performance-based restricted stock unit awards will vest as follows: 25% of the eligible shares will vest immediately, with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service.
A summary of activity of the PSUs for the nine months ended September 30, 2013 is presented below:
Performance-based Stock Units
Number of Units
 
Weighted-
Average
Grant Date
Fair Value Per
Unit
 
(in thousands)
 
 
Non-vested, December 31, 2012
175

 
$
11.00

   Granted
140

 
$
14.74

   Vested
(38
)
 
$
11.02

   Forfeited
(24
)
 
$

Non-vested, September 30, 2013
253

 
$
13.07

Employee Stock Purchase Plan
 
We have an Employee Stock Purchase Plan (“ESPP”) under which employees can purchase shares of our common stock based on a percentage of their compensation, but not greater than 15% of their earnings, up to a maximum of $25,000 of fair value per year. The purchase price per share must be equal to the lower of 85% of the fair value of the common stock at the beginning of a 24-month offering period or the end of each six-month purchasing period. As of September 30, 2013 , 4,233,557 shares had been issued under the ESPP. As of September 30, 2013 there were a total of 1,097,998 shares reserved for future issuance under the ESPP. For the three months and nine months ended September 30, 2013, 193,719 and 450,713 shares, respectively, of common stock were purchased under the ESPP.
 
Share-based Compensation
 
We account for share-based awards granted to employees and directors, including employee stock option awards, restricted stock, PSUs and RSUs issued pursuant to the 2009 Plan and employee stock purchases made under our ESPP using the estimated grant date fair value method of accounting in accordance with ASC 718, Stock Compensation . We value options and ESPP shares using the Black-Scholes-Merton option-pricing model. Restricted stock and time-based RSUs are valued at the grant date fair value of the underlying common shares. The PSUs are valued via Monte Carlo simulation, as described above.
 The impact on our results for share-based compensation for the three and nine months ended September 30, 2013 and 2012 was as follows (in thousands):
 
Three Months Ended September 30,
Nine Months Ended September 30,
 
2013
 
2012
2013
 
2012
Cost of product and service revenues
$
325

 
$
275

$
955

 
$
776

Research and development expenses
405

 
232

1,019

 
686

Selling, general and administrative expenses
2,080

 
1,854

6,449

 
5,319

Total share-based compensation expenses
$
2,810

 
$
2,361

$
8,423


$
6,781

 

Note 14.
Business Acquisition
    
MTS Medication Technologies, Inc.
On May 21, 2012, we completed our acquisition of MedPak Holdings, Inc. ("MedPak") pursuant to an Agreement and Plan of Merger (the "Merger Agreement") under which Mercury Acquisition Corp, a newly formed Omnicell subsidiary, was merged with and into MedPak, with MedPak surviving the merger as a wholly-owned subsidiary of Omnicell. MedPak is the parent company of MTS Medication Technologies, Inc. ("MTS").

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The MTS acquisition primarily was to align Omnicell with the long term trends of the healthcare market to manage the health of patients across the continuum of care. We can now better serve both the acute care and non-acute care markets. Omnicell and MTS bring capabilities to each other that strengthen the product lines and expand the medication management coverage of both companies.
We have accounted for the transaction under the acquisition method of accounting in accordance with the provisions of FASB ASC Topic 805, Business Combinations . Under the acquisition method, the estimated fair value of the consideration transferred to purchase the acquired company is allocated to the assets acquired and the liabilities assumed based on their fair values. We have made significant estimates and assumptions in determining the allocation of the acquisition consideration.
Pursuant to the terms of the Merger Agreement, we paid approximately $158.3 million in cash after adjustments provided for in the Merger Agreement, of which approximately $13.5 million was placed in an escrow fund, which will be distributed to MedPak's stockholders (subject to claims that we may make against the escrow fund for indemnification and other claims following the closing). The revised acquisition consideration of $158.3 million is comprised entirely of cash at closing.
At date of acquisition, we also recorded a $1.8 million liability based on expected additional working capital adjustments. In October 2012, a portion of the escrow fund set aside for the working capital adjustment was disbursed, with Omnicell receiving $0.3 million and MedPak's former stockholders receiving the remainder. As of December 31, 2012, the working capital adjustment was reversed, with a resulting reduction in goodwill of $1.8 million and a corresponding reduction in accrued liabilities. Accounts receivable acquired were recorded at their estimated fair value, comprised of total contractual obligations due of $7.6 million , of which $0.2 million was not expected to be collected. Based on an acquisition date valuation, the preliminary estimated fair values of acquired inventory and property and equipment exceeded their historical carrying values. We recorded a preliminary step-up to the estimated fair value of acquired inventory in the amount of $1.6 million , which resulted in subsequent related charges of $1.6 million to cost of product revenues.
In the fourth quarter of 2012, subsequent to the initial acquisition price allocation, we revised our preliminary determination of the fair value of fixed assets and intangible assets acquired from MTS, resulting in a decrease in the carrying value of acquired fixed assets of $1.3 million , and increase in the carrying value of intangibles of $0.4 million and a net increase in recorded goodwill of $0.9 million . During the first quarter of 2013, we reduced goodwill by $0.1 million due to an adjustment in stockholder's equity.
The total revised acquisition price was approximately $158.3 million and was allocated as follows (in thousands):
 
 
Fair value acquired

 
Cash including restricted cash
 
$
2,000

 
Accounts receivable
 
7,403

 
Inventory
 
11,726

 
Deferred tax assets and other current assets
 
2,894

 
      Total current assets
 
24,023

 
Property and equipment
 
9,807

 
Intangible assets
 
83,900

 
Goodwill
 
82,800

 
Other non-current assets
 
308

 
      Total assets
 
200,838

 
Current liabilities
 
(7,917
)
 
Non-current deferred tax liabilities
 
(33,386
)
 
Other non-current liabilities
 
(1,223
)
 
      Net assets acquired
 
$
158,312

 
 
 
 
 
      Cash consideration, fair value
 
$
158,312

 
 
 
 
 

Identifiable intangible assets. Acquired technology relates to MTS’ products across all of its product lines that have reached technological feasibility, primarily the OnDemand technology. Trade name is primarily related to the MTS and OnDemand brand names. Customer relationships represent existing contracted relationships with pharmacies, institutional care

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Table of Contents

facilities and others. Acquired technology, customer relationships, and trade names will be amortized on a straight-line basis over their estimated useful lives, which range from 12 to 30 years.
The estimated fair values of the acquired technology, trade names and customer relationships were primarily determined using either the relief-from-royalty or excess earnings methods. The interest rates utilized to discount net cash flows to their present values were determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows.
For income tax purposes, the historical tax bases of the acquired assets and assumed liabilities, along with the tax attributes of the MTS companies, will carry over. Because the transaction was a cash-for-stock transaction, there is no tax basis in the newly acquired intangible assets. Accordingly, the acquisition accounting includes the establishment of net deferred tax liabilities of $33.4 million , resulting from book tax basis differences related to the intangible assets acquired, as well as to the step up in the value of fixed assets and inventory to their estimated fair values at the time of acquisition.
Details of acquired intangibles are as follows (in thousands, except for years):
 
 
Fair value acquired

 
Useful Life (years)
 
First year amortization expense

 
Trade name
 
$
6,800

 
12
 
$
567

 
Customer relationships
 
50,500

 
 28 to 30
 
1,707

 
Acquired technology
 
26,600

 
20
 
1,330

 
Intangibles acquired
 
$
83,900

 
 
 
$
3,604

 
 
 
 
 
 
 
 
 
Weighted average life of intangibles
 
 
 
25.14
 
 
 
 
 
 
 
 
 
 
 
Goodwill. Approximately $82.8 million has been allocated to goodwill. Goodwill represents the excess of the fair value of the consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets on the acquisition date. In accordance with ASC Topic 350, Intangibles - Goodwill and Other , goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. We believe the MTS acquisition enhances our offerings and diversifies our revenue mix, providing a more robust product and service solution to our current customers while expanding our international presence. We consider these factors as supporting the amount of goodwill recorded.
For the three and nine months ended September 30, 2013 , we did not incur any acquisition-related costs in connection with the MTS acquisition. For the nine months ended September 30, 2012, we incurred approximately $3.2 million in acquisition related costs related to the MTS acquisition. These costs are included in selling, general and administrative expenses on our Condensed Consolidated Statement of Operations.

Note 15. Segments
Beginning with the acquisition of MTS in May, 2012, we have organized our business into two operating business segments: Acute Care, which primarily includes products and services sold to hospital customers and Non-Acute Care, which primarily includes products and services sold to customers outside of hospital settings.
The Acute Care segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems. The Non-Acute Care segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services, but also includes medication dispensing systems sold to non-acute care pharmacies and facilities. We report segment information based on the management approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (the "CODM") for making decisions and assessing performance as the source of our operating segments. The CODM is our Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment, using information about its revenues, gross profit and income (loss) from operations.
Since 1992, Omnicell has provided automation and business information solutions to acute care hospitals. We have developed product solutions that help optimize various workflows utilized in hospitals. We have also developed sophisticated sales, installation, and service capabilities to serve the specific and special needs of the acute care environment in hospitals. As the acute care market evolves, we see opportunities to provide medication adherence solutions, which were added to our

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Table of Contents

product line through the acquisition of MTS. A portion of our organization structure and management processes will continue to be structured to optimize sales and service of solutions to the acute care market.
Since 1984, MTS has provided medication adherence solutions to the non-acute care market. These solutions provide automated and semi-automated equipment to assist institutional and retail pharmacists in filling medication orders into blister cards, the primary method of medication control in non-acute care settings. Completing the product solution are the consumables used by institutional and retail pharmacists to make the medication adherence package. MTS has developed process manufacturing capabilities as well as sales capabilities to market medication adherence solutions to institutional and retail pharmacies. A portion of our organization structure and management processes will continue to be structured to optimize the product, sales, and service of solutions to the non-acute care market.
During 2012 , we realigned our management reporting structure to report sales of Omnicell's dispensing systems and other related business transactions to long-term care pharmacies and facilities. Accordingly, the operations of this portion of our activities are now being reflected as a part of the Non-Acute Care segment for three and nine months ended September 30, 2013 .
We believe that legislative changes and economic pressures to manage costs will cause healthcare organizations to manage the health of patients across the continuum of care regardless of the setting in which the care is provided. We believe we have the capabilities and market position to provide the tools needed by our customers to manage medications across the continuum of care. But we also believe that the inherent differences between medication management workflows in acute care settings and non-acute care settings will cause our product solutions and marketing strategies to be managed separately for these two customer segments.
Effective in the second quarter of 2013, our management changed its methodology for allocating certain expenses to our reportable segments. We have reclassified segment operating results for the three and nine months ended September 30, 2012 to conform to the 2013 presentation. For the three and nine months ended September 30, 2013 and 2012 , the contributions of our segments to net revenues and income from operations, and the reconciliation to total net income, were as follows (amounts in thousands):
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
Acute Care
 
Non-Acute Care
 
Total
 
Acute Care
 
Non-Acute Care (1)
 
Total
Net revenues from external customers
$
70,640

 
$
23,399

 
$
94,039

 
$
64,394

 
19,937

 
$
84,331

Cost of revenues
28,662

 
13,337

 
41,999

 
26,920

 
11,324

 
38,244

Gross profit
$
41,978

 
$
10,062

 
$
52,040

 
$
37,474

 
$
8,613

 
$
46,087

Gross margin %
59.4
%
 
43.0
%
 
55.3
%
 
58.2
%
 
43.2
%
 
54.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
32,908

 
8,415

 
41,323

 
29,070

 
5,791

 
34,861

Income from operations
$
9,070

 
$
1,647

 
$
10,717

 
$
8,404

 
2,822

 
$
11,226

Operating margin %
12.8
%
 
7.0
%
 
11.4
%
 
13.1
%
 
14.2
%
 
13.3
%
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income (expense), net
 
 
 
 
25

 
 
 
 
 
34

Income before provision for income taxes
 
 
 
 
10,742

 
 
 
 
 
11,260

Provision for income taxes
 
 
 
 
2,987

 
 
 
 
 
4,340

Net income
 
 
 
 
$
7,755

 
 
 
 
 
$
6,920

 
 
 
 
 
 
 
 
 
 
 
 
(1) Non-Acute Care segment includes MTS results from May 21, 2012, the date of acquisition.



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Table of Contents

 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
Acute Care
 
Non-Acute Care
 
Total
 
Acute Care
 
Non-Acute Care (1)
 
Total
Net revenues from external customers
$
204,750

 
$
70,085

 
$
274,835

 
$
191,295

 
$
32,563

 
$
223,858

Cost of revenues
87,784

 
40,276

 
128,060

 
82,859

 
19,787

 
102,646

Gross profit
$
116,966

 
$
29,809

 
$
146,775

 
$
108,436

 
$
12,776

 
$
121,212

Gross margin %
57.1
%
 
42.5
%
 
53.4
%
 
56.7
%
 
39.2
%
 
54.1
%
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses
96,048

 
26,483

 
122,531

 
94,167

 
9,753

 
103,920

Income from operations
$
20,918

 
$
3,326

 
$
24,244

 
$
14,269

 
3,023

 
$
17,292

Operating margin %
10.2
%
 
4.7
%
 
8.8
%
 
7.5
%
 
9.3
%
 
7.7
%
 
 
 
 
 
 
 
 
 
 
 
 
Interest and other income (expense), net
 
 
 
 
(134
)
 
 
 
 
 
57

Income before provision for income taxes
 
 
 
 
24,110

 
 
 
 
 
17,349

Provision for income taxes
 
 
 
 
6,954

 
 
 
 
 
6,703

Net income
 
 
 
 
$
17,156

 
 
 
 
 
$
10,646

 
 
 
 
 
 
 
 
 
 
 
 
(1) Non-Acute Care segment includes MTS results from May 21, 2012, the date of acquisition.
At September 30, 2013 , segment assets were as follows (amounts in thousands):
 
September 30, 2013
 
December 31, 2012
 
Acute Care
 
Non-Acute Care
 
Total
 
Acute Care
 
Non-Acute Care (1)
 
Total
Segment Assets
$
284,067

 
$
221,917

 
$
505,984

 
$
235,186

 
$
206,633

 
$
441,819

 
 
 
 
 
 
 
 
 
 
 
 

At three and nine months ended September 30, 2013 and 2012 , segment depreciation/amortization, and capital expenditures were as follows (amounts in thousands):
 
Three Months Ended September 30, 2013
 
Three Months Ended September 30, 2012
 
Acute Care
 
Non-Acute Care
 
Total
 
Acute Care
 
Non-Acute Care (1)
Total
Depreciation/Amortization
$
2,805

 
$
1,683

 
$
4,488

 
$
2,072

 
$
1,842

$
3,914

Capital Expenditures
1,311

 
745

 
2,056

 
$
4,940

 
$
532

$
5,472

 
 
 
 
 
 
 
 
 
 
 
(1) Non-Acute Care segment includes MTS results from May 21, 2012, the date of acquisition.
 

 
Nine Months Ended September 30, 2013
 
Nine Months Ended September 30, 2012
 
Acute Care
 
Non-Acute Care
 
Total
 
Acute Care
 
Non-Acute Care (1)
Total
Depreciation/Amortization
$
8,351

 
$
5,381

 
$
13,732

 
$
6,538

 
$
2,709

9,247

Capital Expenditures
3,329

 
4,478

 
7,807

 
$
8,947

 
$
612

$
9,559

 
 
 
 
 
 
 
 
 
 
 
(1) Non-Acute Care segment includes MTS results from May 21, 2012, the date of acquisition.
 

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Table of Contents

Note 16. Asset Impairment

Impairment of Software Development Costs
    
As part of the continuing integration of MTS, during the first quarter of 2013, we reorganized our management team, including the software development department, within the Non-Acute Care segment. Through the end of the first quarter of 2013, the Non-Acute Care segment had capitalized approximately $1.8 million of software development costs. associated with a software solution under development which was intended to assist pharmacies in manual packaging of prescriptions. In connection with our financial statement close process for the quarter ended March 31, 2013, our management reassessed the viability of this project and the net realizable value of capitalized costs in light of its decision to change the related product road map and redesign this product based on evolving market demands. As part of this redesign process, new functionality and capabilities will need to be added to the product before commercialization. This redesign is intended to provide a more robust global platform providing larger scalability and significant functionality not contained in our current beta version. As such, we have determined we can no longer support the technological feasibility of this project in conjunction with our software capitalization policy. Therefore, we charged these costs, in the amount of $1.8 million ( $0.03 per diluted share, net of tax), to expense as a component of research and development in the accompanying consolidated condensed statement of operations.

Note 17. Credit Agreement

     In September 2013, we entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and the lenders from time to time party thereto. The Credit Agreement provides for a $75.0 million revolving credit facility with a $10.0 million letter of credit sub-limit. Loans under the Credit Agreement mature on September 25, 2018. The Credit Agreement permits us to request one or more increases in the aggregate commitments provided that such increases do not exceed $25.0 million in the aggregate. We expect to use the proceeds from any revolving loans under the credit facility for general corporate purposes, including future acquisitions. Our obligations under the Credit Agreement are guaranteed by certain of our domestic subsidiaries and secured by substantially all of our and the subsidiary guarantors’ assets. To date, we have not yet drawn any funds under the credit facility.
Amounts drawn under the Credit Agreement bear interest, at our election, at a Eurodollar rate plus a margin of 1.75% per annum, or an alternate base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50% , and (c) LIBOR for an interest period of one month plus 1.75% . We are required to pay a commitment fee of 0.25% per annum on the aggregate undrawn amount of the commitments under the credit facility.
The Credit Agreement contains customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, dividends and other distributions. The Credit Agreement contains financial covenants that require us to, among other things, maintain a maximum consolidated total leverage ratio and a minimum consolidated fixed charge coverage ratio, in each case, as of the last day of each fiscal quarter. We were in full compliance with all covenants at September 30, 2013 .

Item 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements. The forward looking statements are contained principally in the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” Th