Omnicell, Inc.
OMNICELL, Inc (Form: 10-Q, Received: 11/07/2016 16:35:31)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________
FORM 10-Q
(Mark One)
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
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 October 28, 2016 , there were 36,518,362 shares of the registrant's common stock, $0.001 par value, outstanding.
 



Table of Contents

OMNICELL, INC.
TABLE OF CONTENTS
 
 
Page
 
 
 
 
 
 
 
 
 

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Table of Contents

PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3

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OMNICELL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
 
 
September 30,
2016
 
December 31,
2015
 
 
(In thousands, except par value)
 
 
ASSETS
 
Current assets:
 
 
 
 
Cash and cash equivalents
$
47,287

 
$
82,217

 
Accounts receivable, net of allowances for doubtful accounts of $1,218 and $1,240, respectively
177,019

 
107,957

 
Inventories
74,125

 
46,594

 
Prepaid expenses
29,620

 
19,586

 
Other current assets
9,016

 
7,774

 
Total current assets
337,067

 
264,128

 
Property and equipment, net
41,034

 
32,309

 
Long-term investment in sales-type leases, net
18,756

 
14,484

 
Goodwill
311,420

 
147,906

 
Intangible assets, net
187,571

 
89,665

 
Long-term deferred tax assets
2,955

 
2,361

 
Other long-term assets
32,612

 
27,894

 
Total assets
$
931,415

 
$
578,747

 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
Current liabilities:
 
 
 
 
Accounts payable
$
36,715

 
$
22,646

 
Accrued compensation
27,117

 
18,195

 
Accrued liabilities
32,809

 
30,133

 
Long-term debt, net, current
8,410

 

 
Deferred revenue, net
93,120

 
53,656

 
Total current liabilities
198,171

 
124,630

 
Long-term deferred revenue
17,096

 
17,975

 
Long-term deferred tax liabilities
61,576

 
21,822

 
Other long-term liabilities
12,173

 
11,932

 
Long-term debt, net
214,834

 

 
Total liabilities
503,850

 
176,359

 
Commitments and contingencies (Notes 10)


 


 
Stockholders’ equity:
 
 
 
 
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued

 

 
Common stock, $0.001 par value, 100,000 shares authorized; 45,656 and 44,739 shares issued; 36,511 and 35,594 shares outstanding, respectively
46

 
45

 
Treasury stock at cost, 9,145 shares outstanding
(185,074
)
 
(185,074
)
 
Additional paid-in capital
520,272

 
490,354

 
Retained earnings
100,239

 
99,793

 
Accumulated other comprehensive loss
(7,918
)
 
(2,730
)
 
Total stockholders’ equity
427,565

 
402,388

 
Total liabilities and stockholders’ equity
$
931,415

 
$
578,747


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

4

Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Product
$
133,621

 
$
100,941

 
$
392,190

 
$
284,204

Services and other revenues
43,116

 
24,293

 
128,458

 
70,039

Total revenues
176,737

 
125,234

 
520,648

 
354,243

Cost of revenues:
 
 
 
 
 
 
 
Cost of product revenues
76,188

 
51,700

 
224,412

 
143,319

Cost of services and other revenues
19,041

 
9,831

 
56,766

 
28,074

Total cost of revenues
95,229

 
61,531

 
281,178

 
171,393

Gross profit
81,508

 
63,703

 
239,470

 
182,850

Operating expenses:
 
 
 
 
 
 
 
Research and development
15,264

 
9,176

 
42,896

 
25,941

Selling, general and administrative
61,316

 
40,668

 
189,912

 
123,690

Gain on business combination

 

 

 
(3,443
)
Total operating expenses
76,580

 
49,844

 
232,808

 
146,188

Income from operations
4,928

 
13,859

 
6,662

 
36,662

Other income (expense), net
(2,721
)
 
(646
)
 
(6,773
)
 
(1,635
)
Income (loss) before provision for income taxes
2,207

 
13,213

 
(111
)
 
35,027

Provision (benefit) for income taxes
224

 
5,177

 
(557
)
 
11,922

Net income
$
1,983

 
$
8,036

 
$
446

 
$
23,105

Net income per share:
 
 
 
 
 
 
 
Basic
$
0.05

 
$
0.22

 
$
0.01

 
$
0.64

Diluted
$
0.05

 
$
0.22

 
$
0.01

 
$
0.63

Weighted-average shares outstanding:
 
 
 
 
 
 
 
Basic
36,332

 
35,806

 
36,020

 
35,983

Diluted
37,079

 
36,613

 
36,695

 
36,870

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


5

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OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
 
Three months ended
September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands)
Net income
$
1,983

 
$
8,036

 
$
446

 
$
23,105

Other comprehensive income, net of reclassification adjustments:
 
 
 
 
 
 
 
   Unrealized gains on interest rate swap contracts
108

 

 
108

 

   Foreign currency translation adjustments
(502
)
 
(1,555
)
 
(5,296
)
 
(127
)
Other comprehensive loss
(394
)
 
(1,555
)
 
(5,188
)
 
(127
)
Comprehensive income (loss)
$
1,589

 
$
6,481

 
$
(4,742
)
 
$
22,978

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


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Table of Contents

OMNICELL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
 
Nine months ended September 30,
 
2016
 
2015
 
(In thousands)
Operating Activities
 
 
 
Net income
$
446

 
$
23,105

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
43,905

 
18,457

(Gain) loss on disposal of fixed assets
(9
)
 
114

Gain on business combination

 
(3,443
)
Share-based compensation expense
14,063

 
11,267

Income tax benefits from employee stock plans
1,256

 
3,838

Excess tax benefits from employee stock plans
(1,560
)
 
(3,942
)
Deferred income taxes
(4,767
)
 
(2,235
)
Amortization of debt financing fees
1,192

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(25,802
)
 
(25,590
)
Inventories
(7,745
)
 
(12,898
)
Prepaid expenses
(5,782
)
 
5,937

Other current assets
(89
)
 
1,019

Investment in sales-type leases
(5,296
)
 
(3,220
)
Other long-term assets
1,153

 
247

Accounts payable
5,573

 
(127
)
Accrued compensation
(687
)
 
(5,003
)
Accrued liabilities
(1,901
)
 
4,608

Deferred revenue
12,819

 
(5,369
)
Other long-term liabilities
(2,299
)
 
(833
)
Net cash provided by operating activities
24,470

 
5,932

Investing Activities
 
 
 
Purchases of intangible assets, intellectual property, and patents
(1,311
)
 
(331
)
Software development for external use
(10,569
)
 
(9,445
)
Purchases of property and equipment
(10,005
)
 
(6,081
)
Business acquisitions, net of cash acquired
(271,458
)
 
(25,455
)
Net cash used in investing activities
(293,343
)
 
(41,312
)
Financing Activities
 
 
 
Proceeds from debt, net
247,051

 

Repayment of debt and revolving credit facility
(25,000
)
 

Payment for contingent consideration
(3,000
)
 

Proceeds from issuances under stock-based compensation plans
16,516

 
15,665

Employees' taxes paid related to restricted stock units
(1,917
)
 
(2,285
)
Common stock repurchases

 
(50,021
)
Excess tax benefits from employee stock plans
1,560

 
3,942

Net cash provided (used) by financing activities
235,210

 
(32,699
)
Effect of exchange rate changes on cash and cash equivalents
(1,267
)
 
(52
)
Net decrease in cash and cash equivalents
(34,930
)
 
(68,131
)
Cash and cash equivalents at beginning of period
82,217

 
125,888

Cash and cash equivalents at end of period
$
47,287

 
$
57,757

Supplemental cash flow information
 
 
 
Cash paid for interest
$
4,079

 
$
94


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Table of Contents

Cash paid for taxes, net of refunds
$
7,223

 
$
7,027

Supplemental disclosure of non-cash investing activities
 
 
 
Unpaid purchases of property and equipment
$
948

 
$
554

Non-cash activity business acquisition
$

 
$
7,386

 
 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated 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 Europe. "Omnicell" "our", "us", "we" or the "Company" collectively refer to Omnicell, Inc. and its subsidiaries.
Basis of presentation
The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of the Company as of September 30, 2016 and December 31, 2015 , the results of its operations, comprehensive income (loss) and cash flows for the three and nine months ended September 30, 2016 and September 30, 2015 . Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company's annual report on Form 10-K for the year ended December 31, 2015 filed with the SEC on February 26, 2016. The Company's results of operations, comprehensive income (loss) and cash flows for the three and nine months ended September 30, 2016 are not necessarily indicative of results that may be expected for the year ending December 31, 2016 , 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 January 5, 2016, the Company completed the acquisition of all of the membership interests of Aesynt Holding Coöperatief U.A. ("Aesynt"). The significant accounting policies of Aesynt have been aligned to conform to such accounting policies of Omnicell, and the consolidated financial statements include the results of operations of Aesynt commencing as of the acquisition date.
Certain prior year amounts for the provision for excess and obsolete inventories and provision for receivables allowance have been reclassified/combined with inventories and accounts receivable within net cash provided by operating activities in the Condensed Consolidated Statements of Cash Flows to conform to 2016 presentation. These changes are not material and do not impact previously disclosed net cash provided by operating activities, net cash used in investing activities, and net cash used by financing activities.
Use of estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company's Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company's critical accounting policies are those that affect its financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, share-based compensation, inventory valuation, accounts receivable and notes receivable (investment in sales-type leases), capitalized software development costs, valuation of goodwill and purchased intangibles and long-lived assets, fair value of assets acquired and liabilities assumed in business combinations, and accounting for income taxes.
Segment reporting
The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company's segments using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs that are not specific to either of the reportable

9


segments and are managed separately at the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses.
The operating results of the acquired Aesynt business are included in the Company's Automation and Analytics reportable segment.
Interest rate swap agreements
During the second quarter of 2016, the Company entered into interest rate swap agreements. The interest rate swap agreements, at their inception, qualified for and were designated as cash flow hedging instruments. In accordance with the Derivatives and Hedging Topic of the Accounting Standards Codification ("ASC"), the Company records its interest rate swaps on its condensed consolidated balance sheet at fair value. The effective portion of changes in fair value are recorded in accumulated other comprehensive loss and are subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion is recognized in earnings. Both at inception and on a quarterly basis, the Company performs an effectiveness test. For further information regarding these interest rate swap agreements, please refer to Note 4, "Derivative Financial Instruments" below.
Recently adopted authoritative guidance
In April 2015, the Financial Accounting Standards Board ("FASB") issued ASU 2015-05-Intangibles-Goodwill and Other-Internal-Use Software- Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance on determining whether a cloud computing arrangement contains a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company adopted ASU 2015-05 on a prospective basis beginning on January 1, 2016. The impact of ASU 2015-05 did not have a material impact on the Company's consolidated financial position or results of operations for the three and nine months ended September 30, 2016 .
In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. This ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. It applies to entities that measure inventory using a method other than last-in, first-out (LIFO) and the retail inventory method (RIM). The guidance is effective for fiscal years beginning after December 15, 2016. The adoption of this accounting standard update did not have a material impact on the Company's consolidated financial position or results of operations for the three and nine months ended September 30, 2016 .
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU requires adjustments to provisional amounts that are identified during the measurement period of a business combination to be recognized in the reporting period in which the adjustment amounts are determined. An acquirer is no longer required to revise comparative information for prior periods as if the accounting for the business combination had been completed as of the acquisition date. The provisions of ASU 2015-16 are effective for reporting periods beginning after December 15, 2015. The adoption of this accounting standard update did not have a material impact on the Company's consolidated financial position or results of operations for the three and nine months ended September 30, 2016 .
Recently issued authoritative guidance
In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The provision of ASU No. 2016-09 are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments are reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently in the process of evaluating the impact of the adoption of ASU 2016-09 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU requires changes in the presentation of certain items including but not limited to debt prepayment or debt extinguishment costs; contingent consideration payments made after a business combination; proceeds from the settlement of insurance claims; proceeds from the settlement of corporate-owned life insurance policies and distributions received from equity method investees. The new guidance will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years and should be applied prospectively. Early adoption is

10


permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact ASU 2016-15 will have on its consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which reduces the complexity in the accounting standards by allowing the recognition of current and deferred income taxes for an intra-entity asset transfer, other than inventory, when the transfer occurs. Historically, recognition of the income tax consequence was not recognized until the asset was sold to an outside party.  This amendment should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.  ASU 2016-16 is effective for annual periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods.  Early adoption is permitted for all entities as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the impact ASU 2016-16 will have on its consolidated financial statements.
There was no other recently issued and effective authoritative guidance that is expected to have a material impact on the Company's Condensed Consolidated Financial Statements through the reporting date.
Note 2. Business Acquisitions
2016 Acquisition
On January 5, 2016, the Company completed the acquisition of all of the membership interests of Aesynt pursuant to a securities purchase agreement by and among the Company and Aesynt Holding Coöperatief U.A. for total cash consideration of $271.5 million , net of cash on hand at signing of $8.2 million . Aesynt is a provider of automated medication management systems, including central pharmacy dispensing robots with storage solutions, medication storage and dispensing carts and cabinets, I.V. sterile preparation robotics and software, including software related to medication management.
The Company accounted for the purchase of Aesynt in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date.     The following table represents the preliminary estimated allocation of the purchase price to the assets acquired and the liabilities assumed by the Company, reconciled to the purchase price transferred included in the Company's Condensed Consolidated Balance Sheet:
 
(In thousands)
Cash
$
8,164

Accounts receivable
44,084

Inventory
19,690

Other current assets
4,381

      Total current assets
76,319

Property and equipment
10,389

Intangible assets
123,700

Goodwill
166,334

Other non-current assets
968

      Total assets
377,710

   Current liabilities
26,132

Deferred revenue, net
25,598

Non-current deferred tax liabilities
43,927

Other non-current liabilities
2,431

     Total liabilities
98,088

Total purchase price
279,622

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

The goodwill arising from this acquisition is primarily attributed to sales of future products and services and the assembled workforce of Aesynt. The Aesynt acquisition created one of the broadest product portfolio in the industry with significant offerings in automated dispensing systems, central pharmacy robotics, I.V. robotics and enterprise analytics. Goodwill has been assigned to the Automation & Analytics segment and is not deductible for tax purposes. Goodwill is not

11


being amortized but is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with authoritative guidance. Since the acquisition, the Company adjusted the preliminary value assigned to goodwill by $1.5 million to reflect measurement period adjustments related to account receivable, inventory and current liabilities of $0.8 million , $0.4 million and $0.3 million respectively.
Identifiable intangible assets (preliminary) acquired and their respective estimated remaining useful lives over which each asset will be amortized areas are as follows:
 
Fair value
 
Weighted
average
useful life
 
(In thousands)
 
(In years)
Customer relationships
$
58,200

 
14-16
Developed technology
38,800

 
8
Backlog
20,200

 
1-3
In-process research and development ("IPR&D")  (1)
3,900

 
-
Non-compete
1,800

 
3
Trade names
800

 
1
Total purchased intangible assets
$
123,700

 
 
(1) The amortization of the in-process R&D assets begin when the in-process R&D projects are complete.
Customer relationships represent the fair value of the underlying relationships and agreements with Aesynt’s customers, acquired developed technology represents the fair value of Aesynt products that have reached technological feasibility and were part of Aesynt’s product offerings at the date of acquisition, backlog represents the fair value of sales order backlog at the date of acquisition, non-compete intangible asset represents the fair value of non-compete agreements with former key members of Aesynt's management, and trade name represents the fair value of brand and name recognition associated with the marketing of Aesynt’s products and services. In-process research and development ("IPR&D") represents the fair value of incomplete Aesynt research and development projects that had not reached technological feasibility as of the date of acquisition. Incremental costs incurred for those projects are expensed as incurred in research and development.
The fair value of trade names, acquired developed technology, and acquired IPR&D was determined based on an income approach using the relief-from-royalty method at the royalty rates of 0.5% , 4% to 8% and 12.5% , respectively. The fair value of customer relationships, backlog, and non-compete intangible assets were determined based on an income approach using the discounted cash flow method, at the discounted rates of 13% , 10% and 13% , respectively. The intangible assets, except customer relationship and IPR&D, are being amortized over their estimated useful lives using the straight line method of amortization. The customer relationship intangible asset is being amortized using a double-declining method of amortization as such method better represents the economic benefits to be obtained. In accordance with authoritative guidance, the IPR&D is accounted for as an indefinite-lived intangible asset until completion or abandonment of the associated research and development efforts. IPR&D is tested for impairment during the period it is considered an indefinite lived asset. IPR&D related projects are expected to be completed in two to three years. As of September 30, 2016 , none of the IPR&D projects have been completed, and they have progressed as previously estimated.
The Company incurred approximately $9.3 million in acquisition-related costs related to the Aesynt acquisition of which $2.9 million and $ 6.4 million was recognized in three and nine months ended December 31, 2015 and September 30, 2016 , respectively. These costs are included in selling, general and administrative expenses in the Company's Condensed Consolidated Statement of Operations.
Revenues and losses from operations since the acquisition date through September 30, 2016 for Aesynt were $119.9 million and $(30.6) million , respectively. Losses from operations includes the amortization of intangible assets of $20.9 million for the period presented.
Pro forma financial information for 2016 and 2015 acquisitions
The following table presents certain unaudited pro forma information for illustrative purposes only, for the nine months ended September 30, 2016 and 2015 as if Aesynt had been acquired on January 1, 2015. The pro forma information is not indicative of what would have occurred had the acquisitions taken place on January 1, 2015. The unaudited pro forma information combines the historical results of the acquisitions 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 adjustments include the impact of fair value adjustment related to deferred revenue, inventory fair value adjustment,

12


amortization of intangible assets, stock-based compensation expense, interest expense and amortization of deferred issuance cost, and certain classification to conform to Omnicell's accounting policies.
 
Nine months ended September 30,
 
2016
 
2015
 
(In thousands, except per share data)
Pro forma net revenues
$
520,648

$
492,753

Pro forma net income
$
446

$
2,485

Pro forma net income per share basic
$
0.01

$
0.07

Pro forma net income per share diluted
$
0.01

$
0.07

 
 
 
 

Note 3. Net Income Per Share
Basic net income per share is computed by dividing net income for the period by the weighted-average number of shares outstanding during the period. Diluted net income per share is computed by dividing net income for the period by the weighted-average number of shares, less shares repurchased, 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. The anti-dilutive weighted-average dilutive shares related to stock award plans are excluded from the computation of the diluted net loss per share because their effect would have been anti-dilutive.
The calculation of basic and diluted net income per share is as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In thousands, except per share data)
Net income
$
1,983

 
$
8,036

 
$
446

 
$
23,105

Weighted-average shares outstanding — basic
36,332

 
35,806

 
36,020

 
35,983

Effect of dilutive securities from stock award plans
747

 
807

 
675

 
887

Weighted-average shares outstanding — diluted
$
37,079

 
$
36,613

 
$
36,695

 
$
36,870

Net income per share — basic
$
0.05

 
$
0.22

 
$
0.01

 
$
0.64

Net income per share — diluted
$
0.05

 
$
0.22

 
$
0.01

 
$
0.63

Anti-dilutive weighted-average shares related to stock award plans
326

 
478

 
1,255

 
380

Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents as of September 30, 2016 and December 31, 2015 include cash and money market funds, which have original maturities of three months or less.  Due to the short duration to maturity, the carrying value of such financial instruments approximates the estimated fair value.
The cash and cash equivalents at September 30, 2016 and December 31, 2015 were as follows:
 
September 30, 2016
 
December 31, 2015
 
(In thousands)
Cash
$
37,154

 
$
72,103

Money market fund
10,133

 
10,114

Total cash and cash equivalents
$
47,287

 
$
82,217

Fair value hierarchy

13


The Company measures its financial instruments at fair value. The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy as they are valued primarily using quoted market prices utilizing market observable inputs. The Company's foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Company's contingent consideration liability is classified as Level 3 as valuation inputs are unobservable in the market and significant to the instrument’s valuation. During the nine months ended September 30, 2016, the Company paid $3.0 million for contingent consideration and recorded $0.1 million for accrued interest.
The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of September 30, 2016 :
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Money market fund
$
10,133

 
$

 
$

 
$
10,133

Interest rate swap contracts

 
108

 

 
108

Total financial assets
$
10,133

 
$
108

 
$

 
$
10,241

Contingent consideration liability (1)
$

 
$

 
$
2,959

 
$
2,959

Total financial liabilities
$

 
$

 
$
2,959

 
$
2,959

(1) The significant unobservable inputs used in the fair value measurement of the contingent consideration related to the Avantec acquisition classified as Level 3 above are the achievement of booking targets and the discount rate.
The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of December 31, 2015 :
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Money market fund
$
10,114

 
$

 
$

 
$
10,114

Forward contracts

 
32

 

 
32

Total financial assets
$
10,114

 
$
32

 
$

 
$
10,146

Contingent consideration liability (1)
$

 
$

 
$
5,823

 
$
5,823

Total financial liabilities
$

 
$

 
$
5,823

 
$
5,823

(1) The significant unobservable inputs used in the fair value measurement of the contingent consideration classified as Level 3 above are the achievement of booking targets and the discount rate.
Net investment in sales-type leases. The carrying amount of the Company's sales-type lease receivables is a reasonable estimate of fair value as the unearned interest income is immaterial.
Interest Rate Swap Contracts
The Company uses interest rate swap agreement to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company's interest rate swaps, which are designated as cash flow hedges, involve the receipt of variable amounts from counterparties in exchange for the Company making fixed-rate payments over the life of the agreements. The Company does not hold or issue any derivative financial instruments for speculative trading purposes.
During 2016, the Company entered into an interest rate swap agreement with a combined notional amount of $100.0 million  with one counter-party that is effective beginning on June 30, 2016 and maturing on April 30, 2019. The swap agreement requires the Company to pay a fixed rate of  0.8% and provides that the Company will receive a variable rate based on the one month LIBOR rate subject to LIBOR floor of  0.0% . Amounts payable by or due to the Company will be net settled with the respective counter-party on the last business day of each month, commencing July 31, 2016.
The fair value of the interest rate swap agreements at September 30, 2016 were $0.1 million and there were no amounts reclassified into current earnings due to ineffectiveness during the periods presented.


14


Note 5. Balance Sheet Components
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Inventories:
 
 
 
Raw materials
$
14,734

 
$
11,582

Work in process
9,332

 
1,653

Finished goods
50,059

 
33,359

Total inventories
$
74,125

 
$
46,594

 
 
 
 
Property and equipment:
 
 
 
Equipment
$
57,541

 
$
43,533

Furniture and fixtures
6,296

 
5,897

Leasehold improvements
9,531

 
9,063

Software
34,144

 
30,693

Construction in progress
7,469

 
3,651

Property and equipment, gross
114,981

 
92,837

Accumulated depreciation and amortization
(73,947
)
 
(60,528
)
Total property and equipment, net
$
41,034

 
$
32,309

 
 
 
 
Other long term assets:
 
 
 
Capitalized software, net
$
31,219

 
$
26,011

Other assets
1,393

 
1,883

Total other long term assets, net
$
32,612

 
$
27,894

 
 
 
 
Accrued liabilities:
 
 
 
Advance payments from customers
$
5,855

 
$
8,327

Rebates and lease buyouts
4,577

 
4,702

Group purchasing organization fees
3,310

 
2,983

Taxes payable
4,057

 
2,768

Other accrued liabilities
15,010

 
11,353

Total accrued liabilities
$
32,809

 
$
30,133

 
 
 
 
Note 6. Investment in Sales-Type Leases, Net
On a recurring basis, we enter into sales-type lease transactions which vary in length from one to five years. The receivables as a result of these types of transactions are collateralized by the underlying equipment leased and consist of the following components at September 30, 2016 and December 31, 2015 :  
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
Minimum lease payments to be received, net
$
29,030

 
$
22,255

  Less: Unearned interest income portion
(2,443
)
 
(1,014
)
Investment in sales-type leases, net
26,587

 
21,241

  Less: Short-term investment in sales-type leases, net (1)
(7,831
)
 
(6,757
)
Long-term investment in sales-type leases, net
$
18,756

 
$
14,484


15


(1) The short-term portion of the net investments in sales-type leases are included in Other current assets on the Condensed Consolidated Balance Sheets.
The Company evaluates its sales-type leases individually and collectively for impairment. The allowance for credit losses were $0.3 million and $0.2 million as of September 30, 2016 and of December 31, 2015 , respectively.
At September 30, 2016 , the future minimum lease payments under sales-type leases are as follows:
 
September 30,
2016
 
(In thousands)
Remaining three months of 2016
$
2,478

2017
8,350

2018
6,877

2019
5,214

2020
3,277

Thereafter
2,834

Total
$
29,030

Note 7. Goodwill and Intangible Assets
Goodwill
The following table represents changes in the carrying amount of goodwill:
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Net balance as of December 31, 2015
$
54,316

 
$
93,590

 
$
147,906

 Goodwill acquired
166,334

 

 
166,334

 Foreign currency exchange rate fluctuations
(1,496
)
 
(1,324
)
 
(2,820
)
Net balance as of September 30, 2016
$
219,154

 
$
92,266

 
$
311,420

Intangible assets, net
The carrying amounts of intangibles assets as of September 30, 2016 and December 31, 2015 are as follows:
 
September 30, 2016
 
Gross
carrying
amount
 
Accumulated
amortization
 
 Foreign currency exchange rate fluctuations
 
Net
carrying
amount
 
Useful life
(years)
 
(In thousands, except for years)
Customer relationships
$
124,636

 
$
(17,833
)
 
$
(140
)
 
$
106,663

 
1 - 30
Acquired technology
70,150

 
(11,405
)
 
33

 
58,778

 
3 - 20
Backlog
20,559

 
(10,605
)
 
(1
)
 
9,953

 
1 - 3
Trade names
8,558

 
(3,478
)
 
7

 
5,087

 
1 - 12
Patents
2,279

 
(439
)
 

 
1,840

 
2 - 20
Non-compete agreements
1,800

 
(450
)
 

 
1,350

 
3
In-process Technology
3,900

 

 

 
3,900

 

Total intangibles assets, net
$
231,882

 
$
(44,210
)
 
$
(101
)
 
$
187,571

 
 
 

16


 
December 31, 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

 
$
(11,315
)
 
$
(719
)
 
$
57,520

 
5 - 30
Acquired technology
30,870

 
(6,088
)
 
59

 
24,841

 
3 - 20
Trade names
8,052

 
(2,551
)
 
(14
)
 
5,487

 
1 - 12
Patents
1,960

 
(384
)
 

 
1,576

 
2 - 20
Backlog
415

 
(163
)
 
(11
)
 
241

 
2
Total intangibles assets, net
$
110,851

 
$
(20,501
)
 
$
(685
)
 
$
89,665

 
 
Amortization expense of intangible assets was $8.9 million and $2.0 million for the three months ended September 30, 2016 and September 30, 2015 , respectively. Amortization expense of intangible assets was $27.2 million and $5.1 million for the nine months ended September 30, 2016 and September 30, 2015 , respectively.
The estimated future amortization expenses for amortizable intangible assets are as follows:
 
September 30, 2016
 
(In thousands)
Remaining three months of 2016
$
8,869

2017
22,756

2018
21,164

2019
16,093

2020
15,095

Thereafter
103,594

Total
$
187,571

Note 8. Debt
On January 5, 2016 , the Company entered into a $400 million senior secured credit facility pursuant to a credit agreement, by and among the Company, the lenders from time to time party thereto, Wells Fargo Securities, LLC, as Sole Lead Arranger and Wells Fargo Bank, National Association, as administrative agent (the “Credit Agreement”). The Credit Agreement provides for (a) a five -year revolving credit facility of $200 million (the “Revolving Credit Facility”) and (b) a five -year $200 million term loan facility (the “Term Loan Facility” and together with the Revolving Credit Facility, the “Facilities”). In addition, the Credit Agreement includes a letter of credit sub-limit of up to $10 million and a swing line loan sub-limit of up to $10 million . The Credit Agreement expires on January 5, 2021, upon which date all remaining outstanding borrowings are due and payable.
     Loans under the Facilities bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR Rate, plus an applicable margin ranging from 1.50% to 2.25% per annum based on the Company’s Consolidated Total Net Leverage Ratio (as defined in the Credit Agreement), or (b) an alternate base rate equal to the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50% , and (iii) LIBOR for an interest period of one month, plus an applicable margin ranging from 0.50% to 1.25% per annum based on the Company’s Consolidated Total Net Leverage Ratio (as defined in the 2016 Credit Agreement). Undrawn commitments under the Revolving Credit Facility will be subject to a commitment fee ranging from 0.20% to 0.35% per annum based on the Company’s Consolidated Total Net Leverage Ratio on the average daily unused portion of the Revolving Credit Facility. A letter of credit participation fee ranging from 1.50% to 2.25% per annum based on the Company’s Consolidated Total Net Leverage Ratio will accrue on the average daily amount of letter of credit exposure.
     The Company is permitted to make voluntary prepayments at any time without payment of a premium or penalty, except for any amounts relating to the LIBOR breakage indemnity described in the Credit Agreement. The Company is required to make mandatory prepayments under the Term Loan Facility with (a) net cash proceeds from any issuances of debt (other than certain permitted debt) and (b) net cash proceeds from certain asset dispositions (other than certain asset dispositions) and insurance and condemnation events (subject to reinvestment rights and certain other exceptions). Loans under the Term Loan Facility will amortize in quarterly installments, equal to 5% per annum of the original principal amount thereof during the first two years, which shall increase to 10% per annum during the third and fourth years, and 15% per annum during

17


the fifth year, with the remaining balance payable on January 5, 2021. The Company is required to make mandatory prepayments under the Revolving Credit Facility if at any time the aggregate outstanding principal amount of loans together with the total amount of outstanding letters of credit exceeds the aggregate commitments, with such mandatory prepayment to be equal to the amount of such excess.
     The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, dividends and other distributions. The Credit Agreement contains financial covenants that require the Company and its subsidiaries to not exceed a maximum consolidated total leverage ratio and maintain a minimum fixed charge coverage ratio. The Company’s obligations under the Credit Agreement and any swap obligations and banking services obligations owing to a lender (or an affiliate of a lender) are guaranteed by certain of its domestic subsidiaries and secured by substantially all of its and the subsidiary guarantors’ assets. In connection with entering into the Credit Agreement, and as a condition precedent to borrowing loans thereunder, the Company and certain of the Company’s other direct and indirect subsidiaries have entered into certain ancillary agreements, including, but not limited to, a collateral agreement and subsidiary guaranty agreement. The Company was in full compliance with all covenants as of September 30, 2016 .
     On January 5, 2016, the Company borrowed the full $200 million under the Term Loan Facility and $55 million under the Revolving Credit Facility to complete the Aesynt acquisition and pay related fees and expenses. In connection with these Facilities, the Company incurred $7.9 million of debt issuance costs. The debt issuance costs were capitalized and presented as a direct deduction from the carrying amount of that debt liability in accordance with the accounting guidance. The debt issuance costs are being amortized to interest expense using the straight line method from issuance date through 2021.     
The components of the Company’s debt obligations as of September 30, 2016 and December 31, 2015 are as follows:
 
December 31, 2015
Borrowings
Repayment/Amortization
September 30, 2016
 
(In thousands)
Term loan facility
$

$
200,000

$
(5,000
)
$
195,000

Revolving credit facility

55,000

(20,000
)
35,000

   Total debt under the facilities (1)

255,000

(25,000
)
230,000

   Less: Deferred issuance cost

(7,949
)
1,193

(6,756
)
   Total Debt, net of deferred issuance cost
$

$
247,051

$
(23,807
)
223,244

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

   Long term debt, net of deferred issuance cost
 
 
 
$
214,834

(1) The fair value of total debt under the facilities approximates the book value as of September 30, 2016 .

18


Note 9. Deferred revenue
Short-term deferred revenue includes deferred revenue from product sales and service contracts, net of deferred cost of sales of $17.9 million and $15.7 million as of September 30, 2016 and December 31, 2015, respectively. The short-term deferred revenues from product sales relate to the delivered and invoiced products, pending installation and acceptance, expected to occur within the next twelve months.
Long-term deferred revenue includes deferred revenue from the service contracts of $17.1 million and $18.0 million , as of September 30, 2016 and December 31, 2015, respectively.
Note 10. Commitments and Contingencies
Lease commitments
The Company leases office space and office equipment under operating leases. Commitments under operating leases primarily relate to leasehold property and office equipment. At September 30, 2016 , the minimum future payments on non-cancelable operating leases were as follows:
 
 
 
(In thousands)
Remaining three months of 2016
$
2,749

2017
10,755

2018
10,379

2019
10,127

2020
6,459

Thereafter
11,086

Total minimum future lease payments
$
51,555

 
Purchase obligations
During the course of the business, the Company issues purchase orders based on its current manufacturing needs.  At September 30, 2016 , the Company had non-cancelable purchase commitments of $41.0 million , which are expected to be paid within the next twelve months. 
Legal Proceedings
The Company is currently involved in various legal proceedings. As required under ASC 450, Contingencies , the Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss. The Company has not recorded any accrual for contingent liabilities associated with the legal proceedings described below based on its belief that any potential loss, while reasonably possible, is not probable. Further, any possible range of loss in any current matters cannot be reasonably estimated at this time. The Company believes that it has valid defenses with respect to legal proceedings pending against it. However, litigation is inherently unpredictable, and it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of this contingency or because of the diversion of management's attention and the creation of significant expenses.
The Company’s legal proceeding as of  September 30, 2016  was 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 the Company, as well as related state-law claims against the Company 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, the Company filed a Motion to Dismiss the Action.  On March 24, 2015, the Court issued an Order granting in part and denying in part the Motion to Dismiss. Specifically, the Court granted the Company'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). Following an initial Case Management Conference on April 22, 2015, the Court ordered the parties to conduct limited discovery and actively discuss settlement options. On May 17, 2016 the parties reached a settlement agreement in which MV Circuit would dismiss the remaining claims and Omnicell would assign certain patents related to mobile medical cart to MV Circuit.  Omnicell has retained or secured all rights to continue to develop, manufacture, produce, market, license and sell all of its mobile cart product lines, including our SavvyTM mobile medication

19


workstation. On June 1, 2016, the Court dismissed the case with prejudice.

20


Note 11. Income Taxes
The Company provides for income taxes for each interim period based on the estimated annual effective tax rate for the year, adjusting for discrete items in the quarter in which they arise. The annual effective tax rate before discrete items was 43.5% and 39.3% for the nine months ended September 30, 2016 and 2015, respectively. The 2016 annual effective tax rate differed from the statutory rate of 35% 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 and the Federal Research & Development credit, which was permanently reinstated on December 18, 2015. The 2015 annual effective tax rate differed from the statutory rate of 35% 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.
For the nine months ended September 30, 2015 , the Company had 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 nine months ended September 30, 2015 .
As of September 30, 2016 and December 31, 2015, the Company had gross unrecognized tax benefits of $10.2 million and $7.2 million , respectively. The increase is largely due to unrecognized tax benefits recorded as part of the acquisition of Aesynt. It is the Company’s policy to classify accrued interest and penalties as part of the unrecognized tax benefits, but to record interest and penalties in operating expense. As of September 30, 2016 and December 31, 2015, the amount of accrued interest and penalties was $1.3 million and $0.2 million , respectively. The increase is attributable to the interest related to Aesynt's reserves.
As of September 30, 2016 , calendar years 2011 and thereafter are open and subject to potential examination in one or more jurisdictions. However, because all of the net operating loss and research credit carryforwards that may be used in future years are subject to adjustment, if and when utilized, the Company's federal and California tax years remain open from 1996 and 1992, respectively. The Company is currently under examination by the Internal Revenue Service for the 2011 through 2014 tax years.
Although the Company believes it has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. It is not possible at this time to reasonably estimate changes in the unrecognized tax benefits within the next twelve months.
Note 12. Employee Benefits and Share-Based Compensation
Stock based plans
For a detailed explanation of the Company's stock plans and subsequent changes, please refer to Note 11, Employee Benefits and Stock-Based Compensation, of its Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 26, 2016.    
Share-based compensation expense
The following table sets forth the total share-based compensation expense recognized in the Company's Condensed Consolidated Statements of Operations:
 
Three months ended
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(In thousands)
Cost of product and service revenues
$
628

 
$
581

 
$
1,821

 
$
1,630

Research and development
825

 
587

 
2,267

 
1,472

Selling, general and administrative
3,224

 
2,798

 
9,975

 
8,165

Total share-based compensation expense
$
4,677

 
$
3,966

 
$
14,063

 
$
11,267

The following weighted average assumptions are used to value stock options and Employee Stock Purchase Plan ("ESPP") shares issued pursuant to the Company's equity incentive plans for the three and nine months ended September 30, 2016 and September 30, 2015 :

21


 
Three months ended
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
 
Stock Option Plans
 
 
 
 
 
 
 
Expected life, years
4.92

 
5.04

 
4.92

 
5.04

Expected volatility, %
30.0
%
 
29.3
%
 
31.4
%
 
31.1
%
Risk free interest rate, %
1.21
%
 
1.73
%
 
1.34
%
 
1.63
%
Estimated forfeiture rate %
8.6
%
 
2.5
%
 
8.6
%
 
2.5
%
Dividend yield, %
%
 
%
 
%
 
%
 
Three months ended
 
Nine months ended
 
September 30,
2016
 
September 30,
2015
 
September 30,
2016
 
September 30,
2015
 
 
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, %
25.8-34.8%

 
25.8-34.4%

 
25.8-34.8%

 
25.8-37.5%

  Risk free interest rate, %
0.41-0.79%

 
0.12-0.79%

 
0.34-0.79%

 
0.03-0.79%

  Dividend yield, %
%
 
%
 
%
 
%
Stock options activity
The following table summarizes the share option activity under the Company’s equity incentive plans during the nine months ended September 30, 2016 :
 
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, 2015
2,688

 
$
22.89

 
6.9
 
 
Granted
512

 
29.25

 
 
 
 
Exercised
(352
)
 
19.24

 
 
 
 
Expired
(5
)
 
28.75

 
 
 
 
Forfeited
(100
)
 
29.74

 
 
 
 
Outstanding at September 30, 2016
2,743

 
$
24.30

 
7.0
 
$
38,482

Exercisable at September 30, 2016
1,368

 
$
19.36

 
5.2
 
$
25,929

Vested and expected to vest at September 30, 2016 and thereafter
2,597

 
$
23.99

 
6.9
 
$
37,230

_________________________________________________
The weighted-average fair value per share of options granted during the three and nine months ended September 30, 2016 , was $10.32 and $ 8.82 , respectively, and the weighted-average fair value per share of options granted during the three and nine months ended September 30, 2015 was $10.51 and $10.57 , respectively. The intrinsic value of options exercised during the three and nine months ended September 30, 2016 was $2.1 million and $5.0 million , respectively. The intrinsic value of options exercised during the three and nine months ended September 30, 2015 was $3.1 million and $9.7 million , respectively.
As of September 30, 2016 , total unrecognized compensation cost related to unvested stock options was $10.1 million , which is expected to be recognized over a weighted-average vesting period of 2.8 years.
Restricted stock activity
The following table summarizes the restricted stock activity under the Company’s equity incentive plans during the nine months ended September 30, 2016 :

22


 
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, 2015
417

 
$
28.49

 
1.6
 
 
Granted
121

 
29.19

 
 
 
 
Vested
(106
)
 
26.80

 
 
 
 
Forfeited
(19
)
 
27.85

 
 
 
 
Outstanding and unvested at September 30, 2016
413

 
$
29.16

 
1.3
 
$
15,812

The weighted-average grant date fair value per share of RSU granted during the nine months ended September 30, 2016 and September 30, 2015 was $29.19 and $34.72 , respectively.
As of September 30, 2016 , total unrecognized compensation expense related to RSUs was $9.2 million , which is expected to be recognized over the remaining weighted-average vesting period of 2.5 years.
 
Number of
Shares
 
Weighted-Average
Grant Date Fair Value
 
(In thousands, except per share data)
Restricted Stock Awards ("RSAs")
 
 
 
Outstanding at December 31, 2015
31

 
$
35.97

Granted
35

 
31.59

Vested
(31
)
 
36.03

Forfeited

 

Outstanding and unvested at September 30, 2016
35

 
$
31.56

As of September 30, 2016 , total unrecognized compensation cost related to RSAs was $0.6 million , which is expected to be recognized over the remaining weighted-average vesting period of 0.66 years .
Performance-based restricted stock unit activity
The following table summarizes the performance-based restricted stock activity under the Company’s equity incentive plans during the nine months ended September 30, 2016 :
 
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, 2015
151

 
$
23.33

Granted
122

 
24.66

Vested
(52
)
 
23.04

Forfeited

 

Outstanding and unvested at September 30, 2016
221

 
$
24.13

The weighted-average grant date fair value per share of PSUs granted during the nine months ended September 30, 2016 and September 30, 2015 was $24.66 and $29.56 , respectively. As of September 30, 2016 , total unrecognized compensation cost related to PSUs was $2.1 million , which is expected to be recognized over the remaining weighted-average period of 1.2 years.
Employee Stock Purchase Plan activity

23


As of September 30, 2016 , the unrecognized compensation cost related to the shares to be purchased under the ESPP was approximately $5.2 million and is expected to be recognized over a weighted-average period of 2.0 years .
Summary of shares reserved for future issuance under equity incentive plans
The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of September 30, 2016 :
 
Number of Shares
 
(In thousands)
Share options outstanding
2,743

Non-vested restricted share awards
668

Shares authorized for future issuance
2,831

ESPP shares available for future issuance
2,831

Total shares reserved for future issuance
9,073

Stock Repurchase Program
On August 2, 2016, the Board of Directors (the "Board") of (the “Company”) authorized a stock repurchase program providing for the repurchase of up to $50.0 million of the Company’s common stock (the “2016 Repurchase Program”). The 2016 Repurchase Program is in addition to the stock repurchase program approved by the Board on November 4, 2014 (the “2014 Repurchase Program”). As of September 30, 2016, the maximum dollar value of shares that may yet be purchased under the two repurchase programs was $54.9 million .
The timing, price and volume of repurchases are to 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, subject to the terms and conditions of that certain Credit Agreement, dated as of January 5, 2016, among the Company, the Lenders party thereto, and Wells Fargo Bank, National Association, as administrative agent. The stock repurchase program does not obligate the Company to repurchase any specific number of shares, and the Company may terminate or suspend the repurchase program at any time.
During the three and nine months period ended September 30, 2016 , the Company did not repurchase any of its outstanding common stock. The Company repurchased approximately 1,424 thousand shares under its stock repurchase programs for $50.02 million during the nine months ended September 30, 2015 .
Note 13. Segment Information
The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company's segments using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs that are not specific to either of the reportable segments and are managed separately at the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses. The two operating segments, which are the same as the Company's two reportable segments, are as follows:
Automation and Analytics
The Automation and Analytics segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems, pharmacy inventory management systems, and related software. The Automation and Analytics products are designed to enable the Company's customers to enhance and improve the effectiveness of the medication-use process, the efficiency of the medical-surgical supply chain, overall patient care and clinical and financial outcomes of medical facilities. Through modular configuration and upgrades, the Company's systems can be tailored to specific customer needs. The financial results of Aesynt acquired in the first quarter of 2016 are included in the Automation and Analytics segment.
Medication Adherence
The Medication Adherence segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services. These products are used to manage medication administration outside of the hospital setting and include medication adherence products, which consist of proprietary medication packaging systems and related products for use by institutional pharmacies servicing long-term care, and correctional facilities or retail pharmacies serving patients in their local communities.

24


The following table summarizes the financial performance of the Company's reportable segments, including a reconciliation of income from segment operations to income from total operations:
 
Three months ended
 
September 30, 2016
 
September 30, 2015
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Revenues
$
152,437

 
$
24,300

 
$
176,737

 
$
102,967

 
$
22,267

 
$
125,234

Cost of revenues
77,828

 
17,401

 
95,229

 
45,668

 
15,863

 
61,531

Gross profit
74,609

 
6,899

 
81,508

 
57,299

 
6,404

 
63,703

Operating expenses
49,123

 
6,137

 
55,260

 
30,628

 
6,070

 
36,698

Income from segment operations
$
25,486

 
$
762

 
$
26,248

 
$
26,671

 
$
334

 
$
27,005

Corporate costs
 
 
 
 
21,320

 
 
 
 
 
13,146

Income from operations
 
 
 
 
$
4,928

 
 
 
 
 
$
13,859


 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
Automation and
Analytics
 
Medication
Adherence
 
Total
 
(In thousands)
Revenues
$
450,043

 
$
70,605

 
$
520,648

 
$
284,447

 
$
69,796

 
$
354,243

Cost of revenues
233,401

 
47,777

 
281,178

 
123,923

 
47,470

 
171,393

Gross profit
216,642

 
22,828

 
239,470

 
160,524

 
22,326

 
182,850

Operating expenses
151,108

 
17,518

 
168,626

 
85,195

 
18,321

 
103,516

Income from segment operations
$
65,534

 
$
5,310

 
$
70,844

 
$
75,329

 
$
4,005

 
$
79,334

Corporate costs
 
 
 
 
64,182

 
 
 
 
 
42,672

Income from operations
 
 
 
 
$
6,662

 
 
 
 
 
$
36,662

________________________________________________
Significant customers
There were no customers that accounted for more than 10% of our total revenues for the three and nine months ended September 30, 2016 and September 30, 2015 .
    Geographical Information
Revenues
 
Three months ended
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
United States
$
155,989

 
103,944

Rest of world (1)
20,748

 
21,290

Total revenues
$
176,737

 
$
125,234

    

25


 
Nine months ended
 
September 30,
2016
 
September 30,
2015
 
(In thousands)
United States
$
445,470

 
$
297,564

Rest of world (1)
75,178

 
56,679

Total revenues
$
520,648

 
$
354,243

(1)     No individual country represented more than 10% of the respective totals.
  Property and equipment, net
 
September 30,
2016
 
December 31,
2015
 
(In thousands)
United States
$
36,017

 
$
29,506

Rest of world (1)
5,017

 
2,803

Total property and equipment, net
$
41,034

 
$
32,309

_________________________________________________
(1)     No individual country represented more than 10% of the respective totals.
Property and equipment, net is attributed to the geographic location in which it is located.
Note 14. Restructuring Expenses
In second quarter of 2016, the Company integrated its Sales and Field organizations in North America to better serve its customers which resulted in a reduction in headcount of 36 employees . Accordingly, the Company incurred approximately $1.7 million of restructuring expenses in the nine months ended September 30, 2016 , based on agreements with terminated employees covering salary and benefit continuation. As of September 30, 2016 the restructuring program has been concluded. The Company had paid approximately $0.5 million and $1.7 million for the three months and nine months ended September 30, 2016, respectively.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS
This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the United States Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts are forward-looking statements and are contained principally in the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:
our expectations regarding our future product bookings;
the extent and timing of future revenues, including the amounts of our current backlog;
the size or growth of our market or market share;
the opportunity presented by new products, emerging markets and international markets;
our ability to align our cost structure and headcount with our current business expectations;
the operating margins or earnings per share goals we may set;
our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;
our ability to generate cash from operations and our estimates regarding the sufficiency of our cash resources; and

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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. Over 4,000 customers worldwide use Omnicell automation and analytics solutions to increase operational efficiency, reduce medication errors, deliver actionable intelligence and improve patient safety. The acquisition of Aesynt adds distinct capabilities, particularly in central pharmacy and IV robotics, creating the broadest medication management product portfolio in the industry.
Omnicell Medication Adherence solutions, including our MTS Medication Technologies, SureMed and Surgichem brands, provide innovative medication adherence packaging solutions designed to help reduce costly hospital readmissions. In addition, these solutions help enable approximately 17,000 institutional and retail pharmacies in North America and the United Kingdom to maintain high accuracy and quality standards in medication dispensing and administration while optimizing productivity and controlling costs.
We sell our product and consumable solutions together with related service offerings. Revenue generated in the United States represented 88% and 86% of total revenue for both the three and nine months ended September 30, 2016 , respectively. We expect our revenues from international operations to increase in future periods as we continue to grow our international business. We have not sold in the past, and have no future plans to sell our products either directly or indirectly, to customers located in countries that are identified as state sponsors of terrorism by the U.S. Department of State, and are subject to economic sanctions and export controls.
On January 5, 2016, we completed the acquisition of all of the membership interests of Aesynt. Aesynt is a provider of automated medication management systems, including dispensing robots with storage solutions, medication storage and dispensing carts and cabinets, I.V. sterile preparation robotics and software, including software related to medication management. Adding these solution sets to the Omnicell portfolio is intended to give the combined companies one of the most complete medication management offering in the industry. We are now able to support customers who desire a centralized cartfill or nurse server medication distribution model all the way to fully decentralized dispensing and various combinations along that continuum. We are also able to offer solutions for I.V. preparations, including oncology drugs, which is an area where our combined customers have expressed significant interest. Looking across the entire medication distribution model, Aesynt’s new Enterprise Medication Manager software products give the customer the power to optimize the pharmacy supply chain with tools that help manage their inventory, reduce risks of stock outs, and minimize the cost of expiring medications. In addition, Aesynt has an experienced and skilled workforce whose expertise complements our capabilities. Integrating our two product development groups is expected to lead to innovation and the opportunity to help accelerate innovation. Finally, Aesynt has over 1,200 hospital customers with limited overlap to Omnicell’s existing install base, which we expect will drive a significant increase to our customer install base.
Operating Segments
We manage our business as two operating segments, Automation and Analytics and Medication Adherence:

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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. Our acquired companies in the last two years Aesynt, Mach4, and Avantec are included in the Automation and Analytics segment.
Medication Adherence
The Medication Adherence segment primarily includes the design, 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 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.
For further description of our operating segments, refer to Note 13, Segment Information, of the Notes to Consolidated Financial Statements in this quarterly report.
Strategy
The healthcare market is experiencing a period of substantive change. The adoption of electronic healthcare records, new regulatory constraints, and changes in the reimbursement structure have caused healthcare institutions to re-examine their operating structures, re-prioritize their investments, and seek efficiencies. We believe our customers’ evolving operating environment creates challenges for any supplier, but also affords opportunities for suppliers that are able to partner with customers to help them meet the changing demands. We have and intend to continue to invest in the strategies which we believe have generated and will continue to generate our revenue and earnings growth, while supporting our customers’ initiatives and needs. These strategies include:
Development of differentiated 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 employ manual operations, healthcare segments of the U.S. market outside hospitals and markets outside the United States. We weigh the cost of entering these new markets against the expected benefits and focus on the markets that we believe are most likely to adopt our products.
Expansion of our solutions through acquisitions and partnerships. Our acquisitions have generally been focused on automation of manual workflows or data analytics, which is the enhancement of data for our customers’ decision-making processes. We believe that expansion of our product lines through acquisition and partnerships to meet our customers changing and evolving expectations is a key component to our historical and future success.
Our investments have been consistent with the strategies outlined above. To differentiate our solutions from others available in the market, 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 is updated regularly every 6 to18 months with new software enhancements. Since its introduction in 2011, there have been five major software releases. The G4 product refresh has been a key contributor to our growth, with approximately 85.2% 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

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primarily on five markets: the United Kingdom, Germany, and France, where we sell the full range of our products primarily through a direct sales team; Middle Eastern countries of the Arabian Peninsula where new healthcare facility construction is taking place, and in China where we launched a Mandarin version of our automated dispensing systems. We have also expanded our sales efforts to healthcare customers outside of acute care hospitals in the United States which has allowed us to sell our automated dispensing solutions and medication adherence products into these markets.
Expansion of our solutions through acquisitions and partnerships include our acquisition of MTS in 2012, our acquisition of Surgichem in August 2014, our acquisitions of Mach4 and Avantec in April 2015, and our acquisition of Aesynt in January 2016. Surgichem is a provider of medication adherence products in the United Kingdom. Mach4 is a provider of automated medication management systems to retail and hospital pharmacy customers primarily in Europe, with additional installations in China, the Middle East and Latin America. Avantec develops medication and supply automation products that complement our solutions for configurations suited to the United Kingdom marketplace, and had been the exclusive United Kingdom distributor for our medication and supply automation solutions since 2005. Aesynt is a provider of automated medication management systems, including dispensing robots with storage solutions, medication storage and dispensing carts and cabinets, I.V. sterile preparation robotics and software, including software related to medication management. 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 systems; 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 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 revenues of $128.1 million and $87.3 million as of September 30, 2016 and December 31, 2015 , respectively. The current deferred revenue of $93.1 million includes deferred revenue from product sales and service contracts, net of deferred cost of sales of $17.9 million as of September 30, 2016 . The current deferred revenues from product sales relate to the delivered and invoiced products, pending installation and acceptance, expected to occur within the next twelve months. The long-term deferred revenue of $17.1 million as of September 30, 2016 includes deferred revenue from service contracts in excess of twelve months.
The growth in our Automation and Analytics revenue for the three months ended September 30, 2016 was driven primarily by the expansion through the Aesynt acquisition. To a lesser extent but of equal importance, revenue growth was also driven by our growth in the number of our customer installations. Installed customers in the United States grew to 2,904 hospitals as of September 30, 2016 from 1,975 hospitals as of September 30, 2015 , driven primarily by the acquisition of Aesynt. In addition, our success in upgrading installed customers to newer G4 technology, which is in line with our strategy of

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striving to deliver differentiated innovation in our solutions further attributed to the increase in revenue. 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 nine months ended September 30, 2016 . Medication Adherence revenue has remained relatively consistent as the population of patients living in nursing homes, primarily in the United States market, 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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make certain estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of any contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We regularly review our estimates and assumptions, which are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates and assumptions. We believe the following critical accounting policies are affected by significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements:
Revenue recognition;
Accounts receivable and notes receivable (net investment in sales-type leases);
Inventory valuation;
Capitalized software development cost;
Valuation and impairment of goodwill, intangible assets and other long-lived assets;
Business combinations;
Valuation of share-based awards; and
Accounting for income taxes.
There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the nine months ended September 30, 2016 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, 2015. Concurrent with our acquisition of Aesynt in January 2016, certain accounting policies of Aesynt were aligned to conform to the accounting policies of Omnicell.
Recently adopted and issued authoritative guidance
Refer to Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements in this quarterly report for a description of recently adopted and issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.
RESULTS OF OPERATIONS
Total Revenues
 
Three months ended September 30,
 
 
 
2016
 
2015
 
$
 
%
 
(Dollars in thousands)
Product revenues
$
133,621

 
$
100,941

 
$
32,680

 
32
%
Percentage of total revenues
76
%
 
81
%
 
 
 
 
Service and other revenues
43,116

 
24,293

 
18,823

 
77
%
Percentage of total revenues
24
%
 
19
%
 
 
 
 
Total revenues
$
176,737

 
$
125,234

 
$
51,503

 
41
%

30


Product revenues represented 76% and 81% of total revenues for the three months ended September 30, 2016 and September 30, 2015 , respectively. Product revenues increased due to increased sales for Automation and Analytics segment of $30.7 million, and increased sales for Medication Adherence segment of $2.0 million. The acquired company, Aesynt, contributed $21.3 million to the product revenue increase in the Automation and Analytics segment. The remaining increase in this segment was attributed to the continued growth of the Automated Dispensing Cabinet business, larger orders received from our existing customers, and higher implementations. The increase in Medication Adherence segment was attributed to higher sales in the consumable product sales compared to the three months ended September 30, 2015 .
Service and other revenues represented 24% and 19% of total revenues for the three months ended September 30, 2016 and September 30, 2015 , respectively. Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues increased primarily due to an increase from our Automation and Analytics segment of $18.8 million attributed to the acquired company, Aesynt, and higher service renewal fees driven mainly by an increase in installed customer base. The acquired company contributed $17.4 million to the increase in service revenue of Automation and Analytics segment for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 . Service and other revenues from Medication Adherence segment remained flat for the three months ended September 30, 2016 compared to the same period last year.
Our international sales represented 12% and 17% of total revenues for the three months ended September 30, 2016 and September 30, 2015 , respectively, and are expected to be affected by foreign currency exchange rates fluctuations. The year over year decrease in the international sales was primarily related to Aesynt which has higher sales in U.S. in comparison to international sales. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates.
 
Nine months ended September 30,
 
 
 
 
 
Change in
 
2016
 
2015
 
$
 
%
 
(Dollars in thousands)
Product revenues
$392,190
 
$284,204
 
$
107,986

 
38
%
Percentage of total revenues
75
%
 
80
%
 
 
 
 
Service and other revenues
128,458

 
70,039

 
58,419

 
83
%
Percentage of total revenues
25
%
 
20
%
 
 
 
 
Total revenues
$
520,648

 
$
354,243

 
$
166,405

 
47
%
Product revenues represented 75% and 80% of total revenues for the nine months ended September 30, 2016 and September 30, 2015 , respectively. Product revenues increased due to increased sales for our Automation and Analytics segment of $107.3 million and from our Medication Adherence segment of $0.7 million. The acquired companies Aesynt, Mach4 and Avantec contributed approximately $77.0 million to the Automation and Analytics segment for the nine months ended September 30, 2016 . The remaining increase in the Automation and Analytics segment was attributed to customer conversions, larger orders received from our existing customers, and higher implementations, partially offset by decreases in lease renewals.
Service and other revenues represented 25% and 20% of total revenues for the nine months ended September 30, 2016 and September 30, 2015 , respectively. Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues increased primarily due to an increase from our Automation and Analytics segment of $58.3 million. The acquired companies, Aesynt, Mach4 and Avantec contributed approximately $54.3 million to the increase of service revenue of Automation and Analytics segment for the nine months ended September 30, 2016 . The remaining increase in the Automation and Analytics segment service revenue was due to increased product sales.
Our international sales represented 14% and 16% of total revenues for the nine months ended September 30, 2016 and September 30, 2015 , 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 2016 compared to the same periods in 2015 as we fulfill our existing orders and based on our growth in bookings in 2015 and in the first nine months of 2016, some of which will be recognized as revenue in 2016. 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.

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Financial Information by Segment
Revenues
 
Three months ended September 30,
 
 
 
 
 
Change in
 
2016
 
2015
 
$
 
%
Revenues:
(Dollars in thousands)
Automation and Analytics
$