Omnicell, Inc.
OMNICELL, Inc (Form: 10-Q, Received: 08/07/2015 19:15:27)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to                
Commission File No. 000-33043
OMNICELL, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
94-3166458
(IRS Employer
Identification No.)
590 East Middlefield Road
Mountain View, CA 94043
(Address of registrant's principal executive offices, including zip code)

(650) 251-6100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  ý     No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ý     No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý
 
Accelerated filer   o
 
Non-accelerated filer  o
  (Do not check if a
smaller reporting company)
 
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o     No  ý
As of July 31, 2015 , there were 35,906,254 shares of the registrant's common stock, $0.001 par value, outstanding.
 



Table of Contents

OMNICELL, INC.
Form 10-Q
Quarterly Period Ended June 30, 2015
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 

2

Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

3

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
 
 
June 30,
2015
 
December 31,
2014
 
 
(Unaudited)
(In thousands, except par value)
 
 
ASSETS
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
88,028

 
$
125,888

 
Accounts receivable, net of allowances of $1,640 and $1,279, respectively
117,307

 
82,763

 
Inventories, net
46,027

 
31,554

 
Prepaid expenses
15,401

 
23,518

 
Deferred tax assets
12,490

 
12,446

 
Other current assets
6,071

 
7,215

 
Total current assets
285,324

 
283,384

 
Property and equipment, net
34,772

 
36,178

 
Long-term net investment in sales-type leases
10,208

 
10,848

 
Goodwill
149,654

 
122,720

 
Intangible assets, net
94,285

 
82,667

 
Long-term deferred tax assets
1,397

 
1,144

 
Other long-term assets
25,382

 
23,273

 
Total assets
$
601,022

 
$
560,214

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
 
 
 
 
Accounts payable
$
26,085

 
$
19,432

 
Accrued compensation
18,573

 
19,874

 
Accrued liabilities
33,419

 
19,299

 
Deferred service revenue
23,527

 
25,167

 
Deferred gross profit
36,671

 
28,558

 
Total current liabilities
138,275

 
112,330

 
Long-term deferred service revenue
19,056

 
20,308

 
Long-term deferred tax liabilities
32,723

 
30,454

 
Other long-term liabilities
11,620

 
7,024

 
Total liabilities
201,674

 
170,116

 
Commitments and contingencies (Notes 9 & 10)


 


 
Stockholders’ equity:
 
 
 
 
Common stock, $0.001 par value, 100,000 shares authorized; 44,252 and 43,540 shares issued; 35,851 and 35,816 shares outstanding, respectively, respectively
44

 
43

 
Treasury stock, at cost, 8,401 and 7,721 shares outstanding
(160,074
)
 
(135,053
)
 
Additional paid-in capital
475,209

 
457,436

 
Retained earnings
84,102

 
69,033

 
Accumulated other comprehensive income (loss)
67

 
(1,361
)
 
Total stockholders’ equity
399,348

 
390,098

 
Total liabilities and stockholders’ equity
$
601,022

 
$
560,214


The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

4

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2015
 
2014
 
2015
 
2014
 
 
(Unaudited)
(In thousands, except per share data)
 
 
Revenues:
 
 
 
 
 
 
 
 
Product
$
89,154

 
$
85,244

 
$
183,263

 
$
167,824

 
Services and other revenues
23,634

 
19,808

 
45,746

 
38,992

 
Total revenues
112,788

 
105,052

 
229,009

 
206,816

 
Cost of revenues:
 
 
 
 
 
 
 
 
Cost of product revenues
46,203

 
41,003

 
91,619

 
79,903

 
Cost of services and other revenues
9,123

 
8,009

 
18,243

 
16,378

 
Total cost of revenues
55,326

 
49,012

 
109,862

 
96,281

 
Gross profit
57,462

 
56,040

 
119,147

 
110,535

 
Operating expenses:
 
 
 
 
 
 
 
 
Research and development
8,746

 
6,471

 
16,765

 
12,592

 
Selling, general and administrative
39,735

 
37,011

 
83,022

 
75,431

 
Gain on business combination
(3,443
)
 

 
(3,443
)
 

 
Total operating expenses
45,038

 
43,482

 
96,344

 
88,023

 
Income from operations
12,424

 
12,558

 
22,803

 
22,512

 
Interest and other (expense), net
(472
)
 
(40
)
 
(989
)
 
(296
)
 
Income before provision for income taxes
11,952

 
12,518

 
21,814

 
22,216

 
Provision for income taxes
3,201

 
4,729

 
6,745

 
8,233

 
Net income
$
8,751

 
$
7,789

 
$
15,069

 
$
13,983

 
Net income per share:
 
 
 
 
 
 
 
 
Basic
$
0.24

 
$
0.22

 
$
0.42

 
$
0.39

 
Diluted
$
0.24

 
$
0.21

 
$
0.41

 
$
0.38

 
Weighted-average shares outstanding:
 
 
 
 
 
 
 
 
Basic
36,120

 
35,661

 
36,072

 
35,451

 
Diluted
37,030

 
36,618

 
36,987

 
36,478

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

5

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
 
 
Three Months Ended June 30,
Six Months Ended June 30,
 
 
2015
 
2014
2015
 
2014
 
 
(Unaudited)
(In thousands)
 
 
Net income
$
8,751

 
$
7,789

$
15,069

 
13,983

 
Other comprehensive income (loss), net of reclassification adjustments:
 
 
 
 
 
 
 
   Foreign currency translation adjustments
2,305

 
87

1,428

 
119

 
Other comprehensive income (loss)
2,305

 
87

1,428

 
119

 
Comprehensive income
$
11,056

 
$
7,876

$
16,497

 
$
14,102

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

6

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six months ended June 30,
 
2015
 
2014
 
(Unaudited)
(In thousands)
Operating Activities
 
 
 
Net income
$
15,069

 
$
13,983

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
11,977

 
9,391

Gain (loss) on disposal of fixed assets
(5
)
 
202

Gain on business combination
(3,443
)


Provision for receivable allowance
480

 
436

Share-based compensation expense
7,301

 
5,449

Income tax benefits from employee stock plans
3,087

 
3,058

Excess tax benefits from employee stock plans
(3,159
)
 
(3,326
)
Provision for excess and obsolete inventories
168

 
250

Deferred income taxes
(1,717
)
 
860

Changes in operating assets and liabilities:
 
 
 
Accounts receivable, net
(27,676
)
 
(24,408
)
Inventories
(9,633
)
 
(335
)
Prepaid expenses
8,234

 
2,144

Other current assets
1,507

 
1,602

Net investment in sales-type leases
353

 
622

Other long-term assets
64

 
228

Accounts payable
1,364

 
2,494

Accrued compensation
(1,654
)
 
(3,910
)
Accrued liabilities
5,752

 
2,424

Deferred service revenue
(2,892
)
 
2,640

Deferred gross profit
6,008

 
10,788

Other long-term liabilities
(995
)
 
829

Net cash provided by operating activities
10,190

 
25,421

Investing Activities
 
 
 
Acquisition of intangible assets, intellectual property and patents
(225
)
 
(191
)
Software development for external use
(6,127
)
 
(5,507
)
Purchases of property and equipment
(3,764
)
 
(7,335
)
Business acquisitions, net of cash acquired
(23,625
)
 

Net cash used in investing activities
(33,741
)
 
(13,033
)
Financing Activities
 
 
 
Proceeds from issuances under stock-based compensation plans
9,432

 
11,813

Employees' taxes paid related to restricted stock units
(2,046
)
 
(1,729
)
Common stock repurchases
(25,021
)
 
(4,069
)
Excess tax benefits from employee stock plans
3,159

 
3,326

Net cash (used) provided by financing activities
(14,476
)
 
9,341

Effect of exchange rate changes on cash and cash equivalents
167

 
119

Net (decrease) increase in cash and cash equivalents
(37,860
)
 
21,848

Cash and cash equivalents at beginning of period
125,888

 
104,531

Cash and cash equivalents at end of period
$
88,028

 
$
126,379

 
 
 
 
Supplemental cash flow information
 
 
 
Cash paid for interest
$
80

 
$

Cash paid for taxes, net of refunds
$
3,620

 
$
1,723

Supplemental disclosing of non-cash investing activities
 
 
 
Purchase of property and equipment
$
524

 
$
70


7

Table of Contents

Non-cash activity Business acquisition
$
9,197

 
$

 
 
 
 
 
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

8

Table of Contents

OMNICELL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Business
Omnicell, Inc. was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. Our major products are automated medication, supply control systems and medication adherence solutions which are sold in our principal market, which is the healthcare industry. Our market is primarily located in the United States and Canada. "Omnicell," "our," "us," "we," or the "Company" collectively refer to Omnicell, Inc. and its subsidiaries.
Basis of presentation
The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of the Company as of June 30, 2015 and December 31, 2014 , the results of their operations, comprehensive income and cash flows for the three and six months ended June 30, 2015 and June 30, 2014 . 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, 2014 . Our results of operations, comprehensive income and cash flows for the three and six months ended June 30, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015 , or for any future period.
Principles of consolidation
The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
On April 21, 2015, we completed the acquisition of Mach4 Automatisierungstechnik GmbH (“Mach4”), a privately held German limited liability company with registered office in Bochum, Germany. On April 30, 2015, we acquired the 85% of the issued and outstanding ordinary shares of Avantec Healthcare Limited (“Avantec”) not already held by Omnicell. Omnicell previously had a 15% interest in Avantec. The consolidated financial statements include the results of operations of Mach4 and Avantec commencing as of their respective acquisition dates.
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. 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, accounts receivable and notes receivable (net investment in sales-type leases), valuation of goodwill, purchased intangibles and long-lived assets, and accounting for income taxes.
Segment reporting change
As previously disclosed, since the first quarter of 2015, we modified the segment presentation to reflect the changes in how our Chief Operating Decision Maker (“CODM”) reviews the segments and the overall business. This change does not impact previously reported Condensed Consolidated Financial Statements. See Note 14, Segment Information, for additional information on our segment reporting change.
Our CODM is our Chief Executive Officer. With the increase in completed acquisitions in the last two years , our CODM changed how the financial information was reviewed to exclude general corporate-level costs that are not specific to either of the reporting segments when evaluating the operating results of each segment. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses.

9


The historical information presented has been retrospectively adjusted to reflect the modified segment reporting. Our CODM allocates resources and evaluates the performance of our segments using information about its revenues, gross profit and income from operations, excluding certain costs which are managed separately at the corporate level. We enhanced our segment reporting structure to match our operating structure based on how our CODM views the business and allocates resources, beginning in the first quarter of 2015.
Concentration of credit risk
Financial instruments that may potentially subject us to concentrations of credit risk consist principally of cash equivalents and accounts receivable. Cash equivalents are maintained with several financial institutions and may exceed the amount of insurance provided on such balances. The majority of our accounts receivable are derived from sales to customers for commercial applications. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary but generally require no collateral. We maintain reserves for potential credit losses. Our products are broadly distributed and there were no customers that accounted for more than 10% of our accounts receivable as of June 30, 2015 and December 31, 2014 . We believe that we have no significant concentrations of credit risk as of June 30, 2015 .
Significant accounting policies
There have been no material changes in our significant accounting policies for the three and six months ended June 30, 2015 , as compared to the significant accounting policies described in our annual report on Form 10-K for the year ended December 31, 2014 .
Recently issued authoritative guidance
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, which provides new guidance on the recognition of revenue and states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This standard will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted, however, in July 2015, the FASB voted to approve deferring the effective date by one year (i.e., interim and annual reporting periods beginning after December 15, 2017). Early adoption is permitted, but not before the original effective date (i.e., interim and annual reporting periods beginning after December 15, 2016). For financial reporting purposes, the standard allows for either full retrospective adoption, meaning the standard is applied to all of the periods presented, or modified retrospective adoption, meaning the standard is applied only to the most current period presented in the financial statements with the cumulative effect of initially applying the standard recognized at the date of initial application. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial position or results of operations.
There was no other recently issued authoritative guidance that has a material impact on our Condensed Consolidated Financial Statements through the reporting date.
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 the impact is anti-dilutive, these shares were excluded from the calculations of diluted net income per share.

10


The calculation of basic and diluted net income per share is as follows:
 
Three months ended June 30,
Six months ended June 30,
 
2015
 
2014
2015
 
2014
 
(In thousands, except per share data)
Net income
$
8,751

 
$
7,789

$
15,069

 
$
13,983

Weighted-average shares outstanding — basic
36,120

 
35,661

36,072

 
35,451

Dilutive effect of employee stock plans
910

 
957

915

 
1,027

Weighted-average shares outstanding — diluted
37,030

 
36,618

36,987

 
36,478

Net income per share — basic
$
0.24

 
$
0.22

$
0.42

 
$
0.39

Net income per share — diluted
$
0.24

 
$
0.21

$
0.41

 
$
0.38

Anti-dilutive weighted-average shares related to stock award plans
377

 
353

356

 
1,347


Note 3. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents as of June 30, 2015 and December 31, 2014 includes the following significant asset investment class:
Cash equivalents. Cash equivalents consist of money market funds which have original maturities of three months or less, and therefore the carrying amount is a reasonable estimate of fair value due to the short duration to maturity.
The following table summarizes our assets measured at fair value on a recurring basis using Level 1 inputs within the fair value hierarchy:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Cash
$
27,925

 
$
61,311

Money market fund
60,103

 
64,577

Total cash and cash equivalents
$
88,028

 
$
125,888

Fair value hierarchy
The Company measures its financial instruments at fair value. The Company’s cash equivalents are classified within Level 1. Cash equivalents are valued primarily using quoted market prices utilizing market observable inputs. In addition, foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Level 3 valuation inputs include the Company’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation. We did not hold any Level 3 assets or liabilities as of June 30, 2015 and December 31, 2014 . There have been no transfers between fair value measurement levels during the three and six months ended June 30, 2015 .
The following table represents the fair value hierarchy of the Company’s financial assets measured at fair value as of June 30, 2015 :
 
Level 1
 
Level 2
 
Total
 
(In thousands)
Money market funds
$
60,103

 
$

 
$
60,103

Total financial assets
$
60,103

 
$

 
$
60,103

Derivative contracts
$

 
$
92

 
$
92

Total financial liabilities
$

 
$
92

 
$
92



11


The following table represents the fair value hierarchy of the Company’s financial asset measured at fair value as of December 31, 2014 :
 
Level 1
 
Level 2
 
Total
 
(In thousands)
Money market fund
$
64,577

 
$

 
$
64,577

Total financial assets
$
64,577

 
$

 
$
64,577

Net investment in sales-type leases. The carrying amount of our sales-type lease receivables is a reasonable estimate of fair value as the unearned interest income is immaterial.
Foreign Currency Risk Management
We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which is the British Pound. In order to manage foreign currency risk, we enter into foreign exchange forward contracts to mitigate risks associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities of our foreign subsidiaries.  In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. The foreign exchange forward contracts are measured at fair value and reported as other current assets or accrued liabilities on the Condensed Consolidated Balance Sheets. The derivative instruments we use to hedge this exposure are not designated as hedges. Any gains or losses on the foreign exchange forward contracts are recognized in earnings as Other Income/Expense in the period incurred in the Condensed Consolidated Statements of Operations. We do not enter into derivative contracts for trading purposes.
The aggregate notional amounts of our outstanding foreign exchange contracts as of June 30, 2015 were $2.2 million . The aggregate fair value of these outstanding foreign exchange contracts as of June 30, 2015 were $0.1 million . We did not have any outstanding foreign exchange contracts as of December 31, 2014.

12


Note 4. Balance Sheet Components
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Inventories:
 
 
 
Raw materials
$
10,725

 
$
8,254

Work in process
2,554

 
64

Finished goods
32,748

 
23,236

Total inventories, net
$
46,027

 
$
31,554

 
 
 
 
Property and Equipment:
 
 
 
Equipment
$
43,717

 
$
42,829

Furniture and fixtures
5,895

 
5,689

Leasehold improvements
8,991

 
8,701

Purchased software
29,729

 
28,920

Construction in progress
3,982

 
1,538

 
92,314

 
87,677

Accumulated depreciation and amortization
(57,542
)
 
(51,499
)
Total Property and equipment, net
$
34,772

 
$
36,178

 
 
 
 
Other long term assets:
 
 
 
Capitalized software, net
$
23,066

 
$
19,643

Other assets
2,316

 
3,630

Total Other long term assets, net
$
25,382

 
$
23,273

 
 
 
 
Accrued liabilities:
 
 
 
Rebates and lease buyouts
$
7,253

 
$
6,512

Advance payments from customers
7,840

 
4,834

Group purchasing organization fees
3,007

 
3,475

Taxes payable
3,488

 
2,181

Other Accrued liabilities
11,831

 
2,297

Total Accrued liabilities
$
33,419

 
$
19,299

 
 
 
 

Note 5. Net Investment in Sales-Type Leases
The terms of our sales-type leases are generally up to five years in length. Sales-type lease receivables are collateralized by the underlying equipment. Net investment in sales-type leases consists of the following components:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Net minimum lease payments to be received
$
16,674

 
$
17,616

Less: unearned interest income portion
(1,118
)
 
(1,131
)
Net investment in sales-type leases
15,556

 
16,485

Less: short-term portion
(5,348
)
 
(5,637
)
Long-term net investment in sales-type leases
$
10,208

 
$
10,848


13


We evaluate our sales-type leases individually and collectively for impairment, and recorded no collective allowance for credit losses as of June 30, 2015 and $0.2 million as of December 31, 2014 .
The minimum lease payments under sales-type leases are as follows:
 
June 30,
2015
 
(In thousands)
Remainder of 2015
$
3,147

2016
5,308

2017
4,281

2018
2,652

2019
1,054

Thereafter
232

Total
$
16,674


Note 6. Business Acquisitions
Mach4 Acquisition
On April 21, 2015, we completed the acquisition of Mach 4 Automatisierungstechnik GmbH (“Mach4”), a privately held German limited liability company with its registered office in Bochum, Germany pursuant to a share purchase agreement (the “Mach4 Agreement”), under which Omnicell International, Inc., a wholly owned subsidiary of Omnicell Inc., purchased the entire issued share capital of Mach4 (the “Mach4 Acquisition”).
Mach4 manufacturers robotic dispensing systems used by retail and hospital pharmacies and the Mach4 acquisition provides Omnicell with a more robust product offering that is intended to be leveraged to create opportunities to sell additional Omnicell medication cabinets. The robotic storage and dispensing product offering provides Omnicell with a solution to better compete for international market share.
Pursuant to the terms of the Mach4 Agreement, we paid approximately  $17.2 million  in cash after adjustments provided for in the Mach4 Agreement, of which  $2.7 million  was placed in an escrow fund, which will be distributed to Mach4's former stockholders subject to claims that we may make against the escrow fund with respect to indemnification and other claims within 18 months after the closing date of this transaction.
Avantec Acquisition
On April 30, 2015, we completed the acquisition of Avantec Healthcare Limited (“Avantec”), the privately-held distributor of Omnicell’s products in United Kingdom, pursuant to a share purchase agreement (the “Avantec Agreement”). Pursuant to the Avantec Agreement, we acquired the entire issued and outstanding ordinary shares of Avantec that represented the remaining 85% interest in Avantec (the “Avantec Acquisition”). Omnicell previously had a 15% interest in Avantec. Avantec develops medication and supply automation products that complement our solutions for configurations suited to the United Kingdom marketplace, and has been the exclusive distributor of our medication and supply automation solutions since 2005 in the United Kingdom.
Pursuant to the terms of the Avantec Agreement, we agreed to pay $12.0 million in cash (the “Purchase Consideration”) and potential earn-out payments of up to $3.0 million payable after December 31, 2015 and an additional $3.0 million payable after December 31, 2016, based on future bookings. The fair value of these potential earn-out payments as of the acquisition date was $5.6 million . Pursuant to the terms of the Avantec Agreement we retained $1.8 million of the Purchase Consideration to be held to settle any future indemnification claims within 18 months period that we may make following the closing.
Prior to the Avantec Acquisition, we accounted for our 15% ownership interest in Avantec as an equity-method investment. The Avantec acquisition-date carrying book value of our previous equity interest was $1.3 million . This transaction was accounted for as a step acquisition, which required us to re-measure our previously held 15% ownership interest to fair value and record the difference between the fair value and carrying value as a gain. The fair value of the equity investment was determined to be $4.7 million that resulted in a gain of $3.4 million that was recorded in operating income in our Condensed Consolidated Statement of Operations in the period ended June 30, 2015.
Both of the above acquired companies will be in the Company’s Automation and Analytics segment.

14


We are accounting for both transactions under the acquisition method of accounting in accordance with the provisions of FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations . Accordingly, the estimated fair value of the consideration transferred to purchase the acquired companies is allocated to the assets acquired and the liabilities assumed based on their respective fair values. We have made significant estimates and assumptions in determining the allocation of the acquisition consideration.
The purchase price allocations are subject to certain post-closing working capital adjustments for the acquired current assets and current liabilities of both acquisitions at their respective acquisition dates. The total consideration, and the allocation of consideration to the individual net assets is preliminary, as there are remaining uncertainties to be resolved, including the settlement of the final net working capital adjustment for each.
Our preliminary allocation of the total purchase price for each transaction is summarized below:     
 
Mach4
 
Avantec
 
Total
 
(In thousands)
Cash
$
397

 
$
3,392

 
$
3,789

Accounts receivable
3,743

 
3,607

 
7,350

Inventory
3,580

 
1,428

 
5,008

Deferred tax assets and other current assets
368

 
89

 
457

      Total current assets
8,088

 
8,516

 
16,604

Property and equipment
463

 

 
463

Intangibles
7,710

 
6,341

 
14,051

Goodwill
10,520

 
15,606

 
26,126

Other non-current assets
52

 

 
52

      Total assets
26,833

 
30,463

 
57,296

Current liabilities
3,684

 
4,125

 
7,809

Non-current deferred tax liabilities
2,564

 
1,269

 
3,833

Deferred service revenue and gross profit
2,314

 
928

 
3,242

Other non-current liabilities
1,056

 

 
1,056

Total purchase price
$
17,215

 
$
24,141

 
$
41,356

Total purchase price, net of cash received
$
16,818

 
$
20,749

 
$
37,567

    
Identifiable intangible assets
Intangible assets acquired and their respective estimated remaining useful lives over which each asset will be amortized are as follows:
 
Mach4
Avantec
 
Fair Value
 
Weighted
Average
Useful life
Fair Value
 
Weighted
Average
Useful life
 
(In thousands)
 
(In years)
(In thousands)
 
(In years)
Developed Technology
$
3,290

 
8
$

 
Trade name
850

 
6
92

 
2
Customer relationships
3,570

 
11-12
5,834

 
12
Backlog

 
415

 
2
Total purchased intangible assets
$
7,710

 
 
$
6,341

 

Developed technology represents completed technology that has reached the technological feasibility and/or is currently offered for sale to Mach4 customers. The fair value is determined based on the relief from royalty method under the income approach, which requires the valuation specialist to estimate a reasonable royalty rate, identify relevant projected revenues and expenses, and select an appropriate discount rate. A royalty rate of 5.0% was used to value the developed technology. The after-tax cash flows were discounted to present value utilizing a 17.5% discount rate, which is based on the our company-wide

15


required return for this acquisition plus a discount of 1.5% to account for the unique riskiness of the asset. The developed technology had a fair value of $3.3 million and had an estimated economic life of eight years based on estimated technological obsolescence and is being amortized on an accelerated basis.
Trade name represents the fair value brand recognition that was determined using the relief-from-royalty approach. The fair value is determined based on the relief-from-royalty method under the income approach, which requires the valuation specialist to estimate a reasonable royalty rate, identify relevant projected revenues and expenses, and select an appropriate discount rate. A royalty rate of 1.0% and 2.0% was used to value the trade names of Avantec and Mach4, respectively. The value of trade names of $0.1 million for Avantec is being amortized on straight-line method and $0.9 million for Mach4 is being amortized on an accelerated basis.
Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to existing customers of the acquired company. The fair value of the customer relationships is determined based on the excess earnings method under the income approach that resulted in a value of $3.6 million for Mach4 and $5.8 million for Avantec and has been amortized over their useful lives on accelerated basis.
Backlog represents the fair value of sales order backlog as of the valuation date and its fair value is determined based on the excess earnings method under the income approach and is being amortized on straight-line method.
Goodwill
The goodwill arising from these acquisitions is primarily attributed to sales of future products and services and the assembled workforce. Goodwill is not deductible for tax purposes. Goodwill is not being amortized but is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with authoritative guidance.

The following table presents certain unaudited pro forma information for illustrative purposes only, for fiscal 2015 and fiscal 2014 as if Mach4 and Avantec had been acquired on January 1, 2014. The unaudited estimated pro forma information combines the historical results of Mach4 and Avantec with the Company’s consolidated historical results and includes certain adjustments reflecting the estimated impact of fair value adjustments for the respective periods. The pro forma information is not indicative of what would have occurred had the acquisitions taken place on January 1, 2014. Additionally, the pro forma financial information does not include the impact of possible business model changes between Mach4, Avantec and the Company. The Company expects to achieve further business synergies, as a result of the acquisitions that are not reflected in the pro forma amounts that follow. As a result, actual results will differ from the unaudited pro forma information presented (in thousands, except per share data):
 
Six Months Ended June 30,
 
2015
 
2014
 
(In thousands, except per share data)
Pro forma net revenues
$
236,000

 
$
220,000

Pro forma net income
$
15,700

 
$
14,400

Pro forma net income per share basic
$
0.44

 
$
0.41

Pro forma net income per share diluted
$
0.42

 
$
0.39

 
 
 
 

Note 7. Goodwill and Intangible Assets
Goodwill

16


The changes in the carrying amount of goodwill are as follows:
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Net balance as of December 31, 2014
$
28,543

 
$
94,177

 
$
122,720

 Goodwill acquired - Mach4
10,520

 

 
10,520

 Goodwill acquired - Avantec
15,606

 

 
15,606

 Foreign currency exchange rate fluctuations
729

 
79

 
808

Net balance as of June 30, 2015
$
55,398

 
$
94,256

 
$
149,654

Intangible assets, net
The carrying amounts of intangibles as of June 30, 2015 are as follows:
 
June 30, 2015
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
 Foreign Currency Exchange Rate Fluctuations
 
Net
Carrying
Amount
 
Useful Life
(Years)
 
(In thousands, except for years)
Customer relationships
$
69,554

 
$
(9,182
)
 
$
(94
)
 
$
60,278

 
5 - 30
Acquired technology
30,870

 
(4,967
)
 
122

 
26,025

 
3 - 20
Trade names
8,052

 
(2,012
)
 
2

 
6,042

 
1 - 12
Patents
1,879

 
(320
)
 

 
1,559

 
2 - 20
Backlog
415

 
(42
)
 
8

 
381

 
1.7
Total intangibles assets, net
$
110,770

 
$
(16,523
)
 
$
38

 
$
94,285

 
 
 
The carrying amounts of intangibles as of December 31, 2014 are as follows:
 
December 31, 2014
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
 Foreign currency exchange rate fluctuations
 
Net
Carrying
Amount
 
Useful Life
(Years)
 
 
 
 
Customer relationships
$
60,150

 
$
(7,596
)
 
$
(323
)
 
$
52,231

 
5 - 30
Acquired technology
27,580

 
(4,068
)
 

 
23,512

 
3 - 20
Trade names
7,110

 
(1,559
)
 
(17
)
 
5,534

 
3 - 12
Patents
1,655

 
(265
)
 

 
1,390

 
2 - 20
Total intangibles assets, net
$
96,495

 
$
(13,488
)
 
$
(340
)
 
$
82,667

 
 
Amortization expense of intangible assets was $1.8 million and $1.1 million for the three months ended June 30, 2015 and June 30, 2014 , respectively, and $3.1 million and $2.2 million for the six months ended June 30, 2015 and June 30, 2014 , respectively.

17


The estimated future amortization expenses for intangible assets are as follows:
 
June 30,
2015
 
(In thousands)
Remainder of 2015
$
3,510

2016
6,599

2017
5,843

2018
5,463

2019
5,297

Thereafter
67,573

Total
$
94,285


Note 8. Deferred Gross Profit
Deferred gross profit consists of the following:
 
June 30,
2015
 
December 31,
2014
 
(In thousands)
Sales of medication and supply dispensing systems including packaging equipment (1)
$
55,304

 
$
36,947

Less: cost of revenues, excluding installation costs
(18,633
)
 
(8,389
)
Total deferred gross profit
$
36,671

 
$
28,558

_________________________________________________
(1)  
Delivered and invoiced, pending installation.

Note 9. Commitments
Lease commitments
We lease our buildings under operating leases. Commitments under operating leases primarily relate to leasehold property and office equipment.
The minimum future payments on non-cancelable operating leases are as follows:
 
June 30,
2015
 
(In thousands)
Remainder of 2015
$
3,421

2016
6,557

2017
5,900

2018
5,487

2019
5,490

Thereafter
15,295

Total minimum future lease payments
$
42,150

 
Purchase obligations
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. These amounts are associated with agreements that are enforceable and legally binding. Our purchase obligations to our contract manufacturers and suppliers within the next year were $25.2 million as of June 30, 2015 .

18


Note 10. Contingencies
Legal Proceedings
We are currently involved in various legal proceedings. 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 below 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.
Pending legal proceedings as of June 30, 2015 are as follows:
On September 12, 2014, MV Circuit Design, Inc., an Ohio company ("MV Circuit"), brought an action to correct the inventorship of certain patents owned by Omnicell, as well as related state-law claims against Omnicell in the Northern District of Ohio (Case No. 1:14-cv-02028-DAP) regarding allegations of fraud in the filing and prosecution of U.S. Patent Nos. 8,180,485, 8,773,270, 8,812,153, PCT/US2007/003765, PCT/US2011/063597, and PCT/US2011/0635505 (the “Action”). On November 14, 2014, we filed a Motion to Dismiss the Action. MV Circuit responded on January 29, 2015, and we replied in support of our Motion to Dismiss on February 17, 2015. On March 24, 2015, the Court issued an Order granting in part and denying in part the Motion to Dismiss. Specifically, the Court granted Omnicell's Motion to Dismiss with respect to Counts 4, 5, and 6 (declaratory judgments regarding PCT/US2007/003765, PCT/US2011/063597, and PCT/US2011/0635505) and count 13 (civil conspiracy).  The Court denied the Company's Motion to Dismiss with respect to Count 9 (fraud), Count 7 (fraudulent concealment) and Count 8 (negligent misrepresentation). We Answered the Complaint on April 8, 2015.  The Court held a Case Management Conference on April 22, 2015. At the Case Management Conference, the Court assigned this case to a “complex” track and ordered production of initial discovery regarding inventorship and sales of the relevant Omnicell products. No procedural schedule has been set. A status Conference with the court is scheduled for August 26, 2015. We intend to defend the matter vigorously.
On March 19, 2015, a putative class action lawsuit was filed against the Company and two executive officers in the U.S. District Court for the Northern District of California, captioned Nelson v. Omnicell, Inc., et al., Case No. 3:15-cv-01280-HSG.The complaint purported to assert claims on behalf of a class of purchasers of the Company’s stock between May 2, 2014 and March 2, 2015. It alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by purportedly making false and misleading statements regarding the existence of a “side letter” arrangement and the adequacy of internal controls that allegedly resulted in false and misleading financial statements. The Company believed that the claims had no merit and intended to defend the lawsuit vigorously. The Company and the individual defendants were not served with the complaint and on May 20, 2015, the plaintiff filed a notice of voluntary dismissal of the lawsuit without prejudice.
Note 11. Income Taxes
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 38.5% and 39.2% for the six months ended June 30, 2015 and June 30, 2014 , respectively. The 2015 and 2014 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.
We recorded a gain of $3.4 million attributable to the increase in the fair value of Omnicell's 15% minority interest in Avantec which was revalued in conjunction with our purchase of the remaining 85% of Avantec shares. This gain was treated as a discrete item and excluded from profit-before-tax in calculating the annual effective tax rate for the six months ended June 30, 2015 .
The federal research and development credits law, which was extended through December 31, 2014, retroactively has not been extended to the end of 2015. As a result the annual effect tax rate for the six months ended June 30, 2015 and 2014 did not consider the effect of the federal research and development tax credit.
Note 12. Stock Repurchases
In August 2012, our Board of Directors authorized a program (the "2012 Stock Repurchase Program") to repurchase up to $50.0 million of common stock, of which approximately $45.1 million had been repurchased as of December 31, 2014, and

19


the remaining $4.9 million has been repurchased as of June 30, 2015 and the 2012 Stock Repurchase Program has concluded now. In November 2014, our Board of Directors authorized a program (the "2014 Stock Repurchase Program") to repurchase up to $50.0 million of common stock of which approximately $20.1 million had been repurchased as of June 30, 2015. The 2014 Stock Repurchase Program has a total of $29.9 million remaining for future repurchases as of June 30, 2015 , and the program has no expiration date.
During the six months ended  June 30, 2015 , we repurchased approximately 680 thousand  shares under our stock repurchase programs.
The following table summarizes our stock repurchases:
 
June 30,
2015
 
December 31,
2014
 
 
(In thousands, except per share data)
Total number of shares repurchased
680

 
884

 
Dollar amount of shares repurchased
$
25,020

 
$
24,091

 
Average price paid per share
$
36.74

 
$
27.24

 

Note 13. Employee Benefits and Share-Based Compensation
Stock Based plans
For a detailed explanation of our stock plan and subsequent changes please refer to Note 16, Employee Benefits and Stock-Based Compensation, of our Annual Report on Form 10-K for the year ended December 31, 2014.    
Share-based compensation expense
The following table sets forth the total share-based compensation expense recognized in our Condensed Consolidated Statements of Operations:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
 
(In thousands)
Cost of product and service revenues
$
532

 
$
264

 
$
1,049

 
$
532

Research and development
451

 
380

 
885

 
749

Selling, general and administrative
2,653

 
2,076

 
5,367

 
4,168

Total share-based compensation expense
$
3,636

 
$
2,720

 
$
7,301

 
$
5,449


The following weighted average assumptions are used to value share options and Employee Stock Purchase Plan ("ESPP") shares issued pursuant to our equity incentive plans for the three and six months ended June 30, 2015 and June 30, 2014:
 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
 
(In thousands)
Stock Option Plans
 
 
 
 
 
 
 
Expected life, years
5.04

 
4.77

 
5.04

 
4.79

Expected volatility, %
29.3
%
 
35.9
%
 
32.2
%
 
35.4
%
Risk free interest rate, %
1.51
%
 
1.62
%
 
1.58
%
 
1.52
%
Estimated forfeiture rate %
2.5
%
 
2.5
%
 
2.5
%
 
2.5
%
Dividend yield, %
%
 
%
 
%
 
%

20


 
Three Months Ended
 
Six Months Ended
 
June 30,
2015
 
June 30,
2014
 
June 30,
2015
 
June 30,
2014
 
(In thousands)
Employee Stock Purchase Plan
 
 
 
 
 
 
 
Expected life, years
0.5-2.0

 
0.5-2.0

 
0.5-2.0

 
0.5-2.0

Expected volatility, %
28.52%-37.53%

 
29.56%-39.84%

 
23.75%-35.67%

 
29.56%-39.84%

Risk free interest rate, %
0.03%-0.72%

 
0.03%-0.53%

 
0.03%-0.72%

 
0.03%-0.53%

Estimated forfeiture rate %
%
 
%
 
%
 
%
Dividend yield, %
%
 
%
 
%
 
%
Stock option and restricted stock activity
Stock options activity
The following table summarizes the share option activity under the Company’s equity incentive plans during the six months ended June 30, 2015 :
 
Number of
Shares
 
Weighted-Average
Exercise Price
 
Weighted-Average
Remaining Years
 
Aggregate
Intrinsic Value (1)
 
(In thousands, except per share data)
Stock Options        
 
 
 
 
 
 
 
Outstanding at December 31, 2014
2,672

 
$
19.02

 
6.5
 
 
Granted
200

 
34.10

 
 
 
 
Exercised
(340
)
 
15.54

 
 
 
 
Expired
(2
)
 
15.57

 
 
 
 
Forfeited
(67
)
 
23.30

 
 
 
 
Outstanding at June 30, 2015
2,463

 
$
20.60

 
6.5
 
$
42,138

Exercisable at June 30, 2015
1,425

 
$
16.46

 
4.9
 
$
30,277

Vested and expected to vest at June 30, 2015
2,435

 
$
20.50

 
6.4
 
$
41,919

_________________________________________________
(1)  
Intrinsic value is calculated as the difference between the market value or closing price of our common stock as of the last trading day of the year as reported by the NASDAQ Global Select Market, and the exercise price of the option.
The weighted-average fair value per share of options granted during the three and six months ended June 30, 2015 , was $10.09 and $10.61 , respectively and the weighted-average fair value per share of options granted during the three and six months ended June 30, 2014 was $9.00 and $8.29 , respectively. The intrinsic value of options exercised during the three and six months ended June 30, 2015 was $4.3 million and $6.7 million , respectively. The intrinsic value of options exercised during the three and six months ended June 30, 2014 was $5.3 million and $7.9 million , respectively.
As of June 30, 2015 , total unrecognized compensation cost related to unvested stock options was $8.8 million , which is expected to be recognized over a weighted-average vesting period of 2.7 years.
Restricted stock activity

21


Restricted stock activity under the Company’s equity incentive plans in the six months ended June 30, 2015 is as follows:
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
Weighted-Average
Remaining Years
 
Aggregate
Intrinsic Value
 
(In thousands, except per share data)
Restricted Stock Units (RSUs)
 
 
 
 
 
 
 
Outstanding at December 31, 2014
399

 
$
24.00

 
1.5
 
 
Granted
65

 
34.19

 
 
 
 
Vested
(77
)
 
21.57

 
 
 
 
Forfeited
(23
)
 
22.35

 
 
 
 
Outstanding and unvested at June 30, 2015
364

 
$
26.45

 
1.3
 
$
13,714

Expected to vest at June 30, 2015
353

 
 
 
1.3
 
$
13,329

The weighted-average grant date fair value per share of RSUs granted during the six months ended June 30, 2015 was $34.19 , respectively. The weighted-average grant date fair value per share of RSUs granted during the six months ended June 30, 2014 was $26.46 , respectively.
As of June 30, 2015 , total unrecognized compensation expense related to RSUs was $8.4 million , which is expected to be recognized over the remaining weighted-average vesting period of 2.4 years .
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
(In thousands, except per share data)
Restricted Stock Awards (RSAs)
 
 
 
Outstanding at December 31, 2014
36

 
$
26.47

Granted
37

 
36.05

Vested
(41
)
 
26.47

Forfeited
(1
)
 
27.65

Outstanding and unvested at June 30, 2015
31

 
$
35.95

The weighted-average grant date fair value per share of RSAs granted during the six months ended June 30, 2015 was and $36.05 .
As of June 30, 2015 , total unrecognized compensation cost related to RSAs was $1.0 million , which is expected to be recognized over the remaining weighted-average vesting period of 0.9 years .
Performance-based restricted stock units activity
Performance-based restricted stock activity under the Company’s equity incentive plans in the six months ended June 30, 2015 is as follows:
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value Per Unit
 
(In thousands, except per share data)
Performance-based Restricted Stock Units (PSUs)
 
 
 
Outstanding at December 31, 2014
233

 
$
17.96

Granted
60

 
29.56

Vested
(70
)
 
18.91

Forfeited
(27
)
 
14.69

Outstanding and unvested at June 30, 2015
196

 
$
21.63


22


The weighted-average grant date fair value per share of PSUs granted during the six months ended June 30, 2015 and June 30, 2014 was $29.56 and $16.49 , respectively. The total fair value of PSUs that vested during the six months ended June 30, 2015 and June 30, 2014 was $2.6 million and $2.1 million , respectively.
As of June 30, 2015 , total unrecognized compensation cost related to PSUs was approximately $2.5 million , which is expected to be recognized over the remaining weighted-average period of 1.4 years .
Employee Stock Purchase Plan (ESPP) activity
The unrecognized compensation cost related to the shares to be purchased under our ESPP was approximately $2.2 million as of June 30, 2015 , and is expected to be recognized over a weighted-average period of 0.1 years .
Summary of shares reserved for future issuance under equity incentive plans
We had the following ordinary shares reserved for future issuance under its equity incentive plans as of June 30, 2015:
 
Number of Shares
 
(In thousands)
Share options outstanding
2,463

Restricted share awards outstanding
559

Shares authorized for future issuance
4,637

ESPP shares available for future issuance
3,393

Total shares reserved for future issuance as of June 30, 2015
11,052


Note 14. Segment Information
In the first quarter of 2015, we modified the segment presentation to reflect the changes in how our Chief Operating Decision Maker (“CODM”) reviews the segments and the overall business. With the increase in completed acquisitions in the last two years , we changed how the financial information was presented for CODM review to exclude general corporate-level costs that are not specific to either of the reporting segments when evaluating the operating results of each segment. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses.
The historical information presented has been retrospectively adjusted to reflect the modified segment reporting. Our CODM allocates resources and evaluates the performance of our segments using information about its revenues, gross profit and income from operations, excluding certain costs which are managed separately at the corporate level. We enhanced our segment reporting structure to match our operating structure based on how our Chief Operating Decision Maker (“CODM”) views the business and allocates resources, beginning in the first quarter of 2015. Our CODM is our Chief Executive Officer. Retrospective adjustments of prior period financial information have been made to conform to the current period presentation.
The two operating segments, which are the same as our reportable segments, are as follows:
Automation and Analytics
The Automation and Analytics segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems, pharmacy inventory management systems, and related software. Our Automation and Analytics products are designed to enable our customers to enhance and improve the effectiveness of the medication-use process, the efficiency of the medical-surgical supply chain, overall patient care and clinical and financial outcomes of medical facilities. Through modular configuration and upgrades, our systems can be tailored to specific customer needs.
Medication Adherence
The Medication Adherence segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services. These products are used to manage medication administration outside of the hospital setting and include medication adherence products sold under the brand name MTS Medication Technologies ("MTS"), Surgichem Limited ("Surgichem"), and under the Omnicell and Suremed brands. MTS products consist of proprietary medication packaging systems and related products for use by institutional pharmacies servicing long-term care, and correctional facilities or retail pharmacies serving patients in their local communities.

23


    
The following table summarizes the financial performance of our reportable segments, including a reconciliation of income from segment operations to income from total operations:
 
Three Months Ended
 
June 30, 2015
 
June 30, 2014
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Revenues
$
88,701

 
$
24,087

 
$
112,788

 
$
84,702

 
$
20,350

 
$
105,052

Cost of revenues
39,403

 
15,923

 
55,326

 
35,992

 
13,020

 
49,012

Gross profit
49,298

 
8,164

 
57,462

 
48,710

 
7,330

 
56,040

Operating expenses
25,978

 
5,910

 
31,888

 
26,044

 
4,800

 
30,844

Income from segment operations
$
23,320

 
$
2,254

 
$
25,574

 
$
22,666

 
$
2,530

 
$
25,196

Corporate costs
 
 
 
 
13,150

 
 
 
 
 
12,638

Income from operations
 
 
 
 
$
12,424

 
 
 
 
 
$
12,558

 
Six Months Ended
 
June 30, 2015
 
June 30, 2014
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Revenues
$
181,480

 
$
47,529

 
$
229,009

 
$
166,201

 
$
40,615

 
$
206,816

Cost of revenues
78,255

 
31,607

 
109,862

 
70,932

 
25,349

 
96,281

Gross profit
103,225

 
15,922

 
119,147

 
95,269

 
15,266

 
110,535

Operating expenses
54,567

 
12,251

 
66,818

 
51,146

 
9,451

 
60,597

Income from segment operations
$
48,658

 
$
3,671

 
$
52,329

 
$
44,123

 
$
5,815

 
$
49,938

Corporate costs
 
 
 
 
29,526

 
 
 
 
 
27,426

Income from operations
 
 
 
 
$
22,803

 
 
 
 
 
$
22,512

_________________________________________________
Significant customers
There were no customers that accounted for more than 10% of our total revenues for the three and six months ended June 30, 2015 and three and six months ended June 30, 2014 .
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
our expectations regarding our future product bookings, which consist of all firm orders, as evidenced by a contract and purchase order for equipment and software and, generally, by a purchase order for consumables. Equipment and software bookings are installable within 12 months and consumables are generally recorded as revenue within one month;
the extent and timing of future revenues, including the amounts of our current backlog, which represents firm orders that have not completed installation and therefore have not been recognized as revenue;
the size or growth of our market or market share;
the opportunity presented by new products, emerging markets and international markets;

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our ability to align our cost structure and headcount with our current business expectations;
the operating margins or earnings per share goals we may set;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
our ability to generate cash from operations and our estimates regarding the sufficiency of our cash resources; and
our ability to acquire companies, businesses, products or technologies on commercially reasonable terms and integrate such acquisitions effectively.
In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. We discuss many of these risks in this quarterly report in greater detail in Part II - Section 1A “Risk Factors” below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this quarterly report. You should also read this quarterly report and the documents that we reference in this quarterly report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect. All references in this report to "Omnicell," "our," "us," "we," or the "Company" collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries. The term "Omnicell, Inc.," refers only to Omnicell, Inc., excluding its subsidiaries.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
OVERVIEW
Our Business
We are a leading provider of comprehensive automation and business analytics software solutions for patient-centric medication and supply management across the entire healthcare continuum, from the acute care hospital setting to post-acute skilled nursing and long-term care facilities to the home. Our Omnicell Automation and Analytics customers worldwide use our medication automation, supply chain and analytics solutions to help enable them to increase operational efficiency, reduce errors, deliver actionable intelligence and improve patient safety.
Omnicell Medication Adherence solutions, including the MTS, Suremed and Surgichem brands, provide innovative medication adherence packaging solutions that can help reduce costly hospital readmissions and enable institutional and retail pharmacies worldwide to maintain high accuracy and quality standards in medication dispensing and administration while optimizing productivity and controlling costs.
We sell our product and consumable solutions together with related service offerings. Revenue generated in the United States represented 87% and 86% of our total revenues for the three and six months ended June 30, 2015 , respectively, and we expect our revenues from international operations to increase in future periods as we continue to grow our international business. We have not sold in the past, and have no future plans to sell our products either directly or indirectly, to customers located in countries that are identified as state sponsors of terrorism by the U.S. Department of State, and are subject to economic sanctions and export controls.
Operating Segments
Beginning in the first quarter of 2015, we have managed our business according to two product segments, Automation and Analytics and Medication Adherence.
Automation and Analytics
The Automation and Analytics segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems, pharmacy inventory management systems, and related software. Our Automation and Analytics products are designed to enable our customers to enhance and improve the effectiveness of the medication-use process, the efficiency of the medical-surgical supply chain, overall patient care and clinical and financial outcomes of medical facilities. Through modular configuration and upgrades, our systems can be tailored to specific customer needs.

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Medication Adherence
The Medication Adherence segment primarily includes the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services. These products are used to manage medication administration outside of the hospital setting and include medication adherence products sold under the brand name MTS, Surgichem, Suremed and the Omnicell brand. MTS products consist of proprietary medication packaging systems and related products for use by institutional pharmacies servicing long-term care, and correctional facilities or retail pharmacies serving patients in their local communities. Similarly, Surgichem is a provider of medication adherence packaging systems and solutions to the United Kingdom community and home care markets.
Strategy
The healthcare market is experiencing a period of substantive change. The adoption of electronic healthcare records, new regulatory constraints, and changes in the reimbursement structure have caused healthcare institutions to re-examine their operating structures, re-prioritize their investments, and seek efficiencies. We believe our customers’ evolving operating environment creates challenges for any supplier, but also affords opportunities for suppliers that are able to partner with customers to help them meet the changing demands. We have and intend to continue to invest in the strategies which we believe have generated and will continue to generate our revenue and earnings growth, while supporting our customers’ initiatives and needs. These strategies include:
Development of differentiated products. We invest in the development of products that we believe bring patient safety and workflow efficiency to our customers’ operations that they cannot get from other competing solutions. These differentiators may be as small as how a transaction operates or information provided on a report or as large as the entire automation of a workflow that would otherwise be completed manually. We intend to continue our focus on differentiating our products, and we carefully assess our investments regularly as we strive to ensure those investments provide the solutions most valuable to our customers.
Deliver our solutions to new markets . Areas of healthcare where work is done manually may benefit from our existing solutions. These areas include hospitals that continue to utilize manual operations, healthcare segments of the U.S. market outside hospitals and markets outside the United States. We weigh the cost of entering these new markets against the expected benefits and focus on the markets that we believe are most likely to adopt our products.
Expansion of our solutions through acquisitions and partnerships. Our acquisitions have generally been focused on automation of manual workflows or data analytics, which is the enhancement of data for our customers’ decision-making processes. We believe that expansion of our product lines through acquisition and partnerships to meet our customers changing and evolving expectations is a key component to our historical and future success.
Our investments have been consistent with the strategies outlined above. To differentiate our solutions from others available in the market, we began shipping a refresh of our product line in 2011, which we market as G4. The G4 refresh included multiple new products and an upgrade product that allowed existing customers to augment their installations to obtain the most current technology that we provide. The G4 product refresh has been a key contributor to our growth, with 69% of our automation and analytics installed base ordering upgrades to their existing systems since the announcement of G4. In addition to enhanced capabilities, we have focused on attaining the highest quality and service measurements for G4 in the industry, while marketing the solution to new and existing customers. Our research and development efforts today are designed to bring new products to market beyond the G4 product line that we believe will meet customer needs in years to come.
Consistent with our strategy to enter new markets, we have made investments in our selling, general and administrative expenses to expand our sales team and market to new customers. Our international efforts have focused primarily on four markets: the United Kingdom and Germany where we sell automation and analytics and medication adherence products through a direct sales team and automation and analytics products are now sold through a direct sales team with our acquisition of Avantec; Germany, where we sell medication adherence products through a direct sales team, Middle Eastern countries of the Arabian Peninsula where new healthcare facility construction is taking place; and China, where we launched a Mandarin version of our automated dispensing systems in 2011. We have also expanded our sales efforts to medication adherence customers in the United States, which has allowed us to sell our automated dispensing solutions and other products to this market.
Expansion of our solutions through acquisitions and partnerships include our acquisition of MTS in 2012, our acquisition of Surgichem in August 2014 and our acquisitions of Mach4 and Avantec in April 2015. Surgichem is a provider of medication adherence products in the United Kingdom. Mach4 is a provider of automated medication management systems to retail and hospital pharmacy customers primarily in Europe, with additional installations in China, the Middle East and Latin

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America. Avantec develops medication and supply automation products that complement our solutions for configurations suited to the United Kingdom marketplace, and has been the exclusive United Kingdom distributor for our medication and supply automation solutions since 2005. We have also developed relationships with major providers of hospital information management systems with the goal of enhancing the interoperability of our products with their systems. We believe that enhanced interoperability will help reduce implementation costs, time, and maintenance for shared clients, while providing new clinical workflows designed to enhance efficiency and patient safety.
We believe that the success of our three-leg strategy of differentiated products, expansion into new markets, and acquisition and partnership in future periods will be based on, among other factors:
Our expectation that the overall market demand for healthcare services will increase as the population grows, life expectancies continue to increase and the quality and availability of healthcare services increases;
Our expectation that the environment of increased patient safety awareness, increased regulatory control, increased demand for innovative products that improve the care experience and increased need for workflow efficiency through the adoption of technology in the healthcare industry will make our solutions a priority in the capital budgets of healthcare facilities; and
Our belief that healthcare customers will continue to value a consultative customer experience from their suppliers.
Among other financial measures, we utilize product bookings to assess the current success of our strategies. Product bookings consist of all firm orders, as evidenced by a contract and purchase order for equipment and software, and by a purchase order for consumables. Equipment and software bookings are installable within twelve months and generally recorded as revenue upon customer acceptance of the installation. Consumables are recorded as revenue upon shipment to a customer or receipt by the customer, depending upon contract terms. Consumable bookings are generally recorded as revenue within one month.
In addition to product solution sales, we provide services to our customers. Our healthcare customers expect a high degree of partnership involvement from their technology suppliers throughout their ownership of the products. We provide extensive installation planning and consulting as part of every product sale and included in the initial price of the solution. Our customers' medication control systems are mission critical to their success and our customers require these systems to be functional at all times. To help assure the maximum availability of our systems, our customers typically purchase maintenance and support contracts in one, two or five year increments. As a result of the growth of our installed base of customers, our service revenues have also grown. We strive to provide the best service possible, as measured by third-party rating agencies and by our own surveys, to assure our customers continue to seek service maintenance from us. Our liabilities include current and long-term deferred service revenue of $42.6 million and $45.5 million as of June 30, 2015 and December 31, 2014 , respectively. Our deferred service revenue will be amortized to service revenue as the service contracts are executed.
The growth in our Automation and Analytics revenue for the three and six months ended June 30, 2015 was driven primarily by our success in consistently growing the number of our customer installations. Installed customers in the United States grew to 1975 hospitals as of June 30, 2015 from 1886 hospitals as of June 30, 2014 . To a lesser extent, but of equal importance, revenue growth was also driven by our success in upgrading installed customers to newer G4 technology, which is in line with our strategy of striving to deliver differentiated innovation in our solutions. Our larger installed base has provided growth opportunities for follow on sales and increased service contracts and, as a result, our service revenues have also grown for the three and six months ended June 30, 2015 .
The growth in our Medication Adherence revenue was driven primarily by increased adoption of multi-medication adherence solutions used by patients in assisted living or home care in Europe for the three months ended June 30, 2015 . This growth is in line with our strategy to deliver solutions to markets outside the United States. On a geographic basis, the United States market did not contribute to, nor erode, the growth in our Medication Adherence business as the population of patients living in nursing homes in the United States has remained relatively constant over the past year.
In the future, we expect our strategies to evolve as the business environment of our customers evolves, but for our focus to remain on improving healthcare with solutions that help change practices in ways that improve patient and provider outcomes. We expect our investment in differentiated products, new markets, and acquisitions and partnerships to continue. In 2015, we also intend to manage our business to operating profit margins similar to those achieved in 2014.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these

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financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions. We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements:
Revenue recognition;
Accounts receivable and notes receivable (net investment in sales-type leases);
Valuation and impairment of goodwill, intangible assets and other long-lived assets;
Excess and obsolete inventory reserve;
Valuation of share-based awards; and
Accounting for income taxes.
There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the three and six months ended June 30, 2015 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2014.
Recently issued authoritative guidance
Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements in this quarterly report for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.
RESULTS OF OPERATIONS
Total Revenues
 
Three Months Ended June 30,
 
 
 
 
 
Change in
 
2015
 
2014
 
$
 
%
 
(Dollars in thousands)
Product revenues
$
89,154

 
$
85,244

 
3,910

 
5
%
Percentage of total revenues
79
%
 
81
%
 
 
 
 
Service and other revenues
23,634

 
19,808

 
3,826

 
19
%
Percentage of total revenues
21
%
 
19
%
 
 
 
 
Total revenues
$
112,788

 
$
105,052

 
$
7,736

 
7
%
Product revenues represented 79% and 81% of total revenues for the three months ended June 30, 2015 and June 30, 2014 , respectively. Product revenues increased due to increased sales for Medication Adherence segment of $3.8 million. Product sales from our Automation and Analytics segment remained flat. The newly acquired companies Mach4 and Avantec contributed approximately $2.9 million to the product revenue of Automation and Analytics segment for the three months ended June 30, 2015 .
Service and other revenues represented 21% and 19% of total revenues for the three months ended June 30, 2015 and June 30, 2014 . Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues primarily increased due to an increase from our Automation and Analytics segment of $3.9 million which is partially offset by a decrease in service revenues from Medication Adherence segment of less than $0.1 million. The newly acquired companies Mach4 and Avantec contributed approximately $1.3 million to the service revenue of Automation and Analytics segment for the three months ended June 30, 2015 .
Our international sales represented 14% and 10% of total revenues for the three months ended June 30, 2015 and June 30, 2014 , respectively, and are expected to be affected by foreign currency exchange rates fluctuations. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates.

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Six Months Ended June 30,
 
 
 
 
 
Change in
 
2015
 
2014
 
$
 
%
 
(Dollars in thousands)
Product revenues
$
183,263

 
$
167,824

 
15,439

 
9
%
Percentage of total revenues
80
%
 
81
%
 
 
 
 
Service and other revenues
45,746

 
38,992

 
6,754

 
17
%
Percentage of total revenues
20
%
 
19
%
 
 
 
 
Total revenues
$
229,009

 
$
206,816

 
$
22,193

 
11
%
Product revenues represented 80% and 81% of total revenues for the six months ended June 30, 2015 and June 30, 2014 , respectively. Product revenues increased due to increased sales for both our Automation and Analytics segment of $8.5 million and Medication Adherence segment of $6.9 million. The newly acquired companies Mach4 and Avantec contributed approximately $2.9 million to the Automation and Analytics segment for the six months ended June 30, 2015 .
Service and other revenues represented 20% and 19% of total revenues for the six months ended June 30, 2015 and June 30, 2014 , respectively. Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues primarily increased due to an increase from our Automation and Analytics segment of $6.8 million. The newly acquired companies Mach4 and Avantec contributed approximately $1.3 million to the service revenue of Automation and Analytics segment for the three months ended June 30, 2015 .
Our international sales represented 14% and 10% of total revenues for the six months ended June 30, 2015 and June 30, 2014 , respectively, and are expected to be affected by foreign currency exchange rates fluctuations. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates.
We anticipate our revenues will continue to increase in 2015 compared to the same periods in 2014 as we fulfill our existing orders and based on our growth in bookings in 2014 and in the first six months of 2015, some of which will be recognized as revenue in 2015. Our ability to continue to grow revenue is dependent on our ability to continue to obtain orders from customers, our ability to produce quality consumables to fulfill customer demand, the volume of installations we are able to complete, our ability to meet customer needs by providing a quality installation experience, and our flexibility in manpower allocations among customers to complete installations on a timely basis. The timing of our product revenues for equipment is primarily dependent on when our customers’ schedules allow for installations.
Financial Information by Segment
Revenues
 
Three Months Ended June 30,
 
 
 
 
 
Change in
 
2015
 
2014
 
$
 
%
Revenues:
(Dollars in thousands)
Automation and Analytics
$
88,701

 
$
84,702

 
$
3,999

 
5
%
Percentage of total revenues
79
%
 
81
%
 
 
 
 
Medication Adherence
24,087

 
20,350

 
3,737

 
18
%
Percentage of total revenues
21
%
 
19
%
 
 
 
 
Total revenues
$
112,788

 
$
105,052

 
$
7,736

 
7
%
The increase in Automation and Analytics revenues for the three months ended June 30, 2015 in comparison to the three months ended June 30, 2014 was due to increase in Service and other revenues of $3.9 million, $2.3 million of which was primarily due to higher service renewal fees driven primarily by an increase in installed customer base and as well as $1.3 million contributed by the newly acquired companies Mach4 and Avantec. The product revenues remained flat primarily due to delayed installations. Our installations in progress include a higher proportion of new and competitive conversion customers and larger installations. These installations take longer to install as the customers spend more time planning the installation, assuring interfaces to other computer systems used in the facility are fully tested, and in the training of their staff.
Medication Adherence revenues increased for the three months ended June 30, 2015 in comparison to the three months ended June 30, 2014 primarily due to an increase in product revenues of $3.8 million primarily driven by the inclusion of

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Surgichem operations since its acquisition in August 2014. Service and other revenues decreased slightly by $0.1 million.
 
Six Months Ended June 30,
 
 
 
Change in
 
 
 
2015
 
2014
 
$
 
%
Revenues:
(Dollars in thousands)
Automation and Analytics
$
181,480

 
$
166,201

 
$
15,279

 
9
%
Percentage of total revenues
79
%
 
80
%
 
 
 
 
Medication Adherence
47,529

 
40,615

 
6,914

 
17
%
Percentage of total revenues
21
%
 
20
%
 
 
 
 
Total revenues
$
229,009

 
$
206,816

 
$
22,193

 
11
%
The increase in Automation and Analytics revenues for the six months ended June 30, 2015 in comparison to the six months ended June 30, 2014 was due to an increase in product revenues of $8.5 million primarily due to the increase of $5.6 million in automation dispensing systems and related software sales, and $2.9 million from the newly acquired companies Mach4 and Avantec. Service and other revenues increased by $5.5 million primarily from higher service renewal fees driven mainly by an increase in installed customer base and $1.3 million due to the newly acquired companies Mach4 and Avantec.
Medication Adherence revenues increased for the six months ended June 30, 2015 in comparison to the six months ended June 30, 2014 , primarily due to an increase in product revenues of $6.9 million primarily driven by the inclusion of Surgichem operations since its acquisition in August 2014. Service and other revenues remained relatively flat compared to the prior year.
Cost of Revenues and Gross Profit
Cost of revenues is primarily comprised of three general categories: (i) standard product costs which accounts for the majority of the product cost of revenues that are provided to customers, and are inclusive of purchased material, labor to build the product and overhead costs associated with production; (ii) installation costs as we install our equipment at the customer site, and include costs of the field installation personnel, including labor, travel expense, and other expenses; and (iii) other costs including variances in standard costs and overhead, scrap costs, rework, warranty, provisions for excess and obsolete inventory and amortization of software development costs and intangibles.
 
Three Months Ended June 30,
 
 
 
 
 
Change in
 
2015
 
2014
 
$
 
%
Cost of revenues:
(Dollars in thousands)
Automation and Analytics
$
39,403

 
$
35,992

 
$
3,411

 
9