Edgar Filing: OMNICELL, Inc

OMCL 2014 Q2 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

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FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 000-33043

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Omnicell, Inc.

(Exact name of registrant as specified in its charter)



Delaware		94-3166458
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

590 East Middlefield Rd.

Mountain View, CA 94043

(650) 251-6100

(Address, including zip code, of registrant’s principal executive

offices and registrant’s telephone number, including area code)

——————————————————————————————————————

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer o		Accelerated filer x

Non-accelerated filer o		Smaller reporting company o
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares of Registrant’s common stock (par value $0.001) outstanding as of August 1, 2014 was 35,872,538.

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OMNICELL, INC.

FORM 10-Q

Table of Contents



		Page number
PART I—FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	3
	Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013	3
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2014 and 2013	4
	Condensed Consolidated Statement of Comprehensive Income for the three and six months ended June 30, 2014 and 2013	5
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	43

PART II—OTHER INFORMATION		43
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	56

SIGNATURES		57
INDEX TO EXHIBITS		58

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PART I — FINANCIAL INFORMATION


Item 1.	Financial Statements

OMNICELL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited, in thousands)



	June 30, 2014		December 31, 2013
ASSETS
Current assets:
Cash and cash equivalents	$	126,379	$	104,531
Accounts receivable, net of allowances of $942 and $490, respectively	82,560		58,597
Inventories	31,542		31,457
Prepaid expenses	16,739		18,883
Deferred tax assets	12,636		12,635
Other current assets	6,040		7,675
Total current assets	275,896		233,778
Property and equipment, net	37,257		35,254
Non-current net investment in sales-type leases	10,872		11,485
Goodwill	111,343		111,343
Intangible assets, net	79,561		81,602
Non-current deferred tax assets	1,102		1,102
Other assets	21,220		17,937
Total assets	$	537,251	$	492,501
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	18,965	$	16,471
Accrued compensation	15,694		19,604
Accrued liabilities	16,170		13,746
Deferred service revenue	21,720		22,626
Deferred gross profit	30,745		19,957
Total current liabilities	103,294		92,404
Non-current deferred service revenue	21,309		17,763
Non-current deferred tax liabilities	29,023		28,162
Other long-term liabilities	6,004		5,175
Commitments and Contingencies (Note 10 and Note 11)
Total liabilities	159,630		143,504
Stockholders’ equity:
Total stockholders’ equity	377,621		348,997
Total liabilities and stockholders’ equity	$	537,251	$	492,501

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited, in thousands, except per share data)



	Three Months Ended June 30,					Six Months Ended June 30,
	2014			2013		2014			2013
Revenues:
Product revenues	$	85,244		$	75,581	$	167,824		$	144,817
Services and other revenues	19,808			18,105		38,992			35,979
Total revenues	105,052			93,686		206,816			180,796
Cost of revenues:
Cost of product revenues	41,003			36,286		79,903			69,833
Cost of services and other revenues	8,009			8,032		16,378			16,228
Total cost of revenues	49,012			44,318		96,281			86,061
Gross profit	56,040			49,368		110,535			94,735
Operating expenses:
Research and development	6,471			7,150		12,592			15,104
Selling, general and administrative	37,011			32,859		75,431			66,104
Total operating expenses	43,482			40,009		88,023			81,208
Income from operations	12,558			9,359		22,512			13,527
Interest and other income (expense), net	(40		)	63		(296		)	(159		)
Income before provision for income taxes	12,518			9,422		22,216			13,368
Provision for income taxes	4,729			3,406		8,233			3,967
Net income	$	7,789		$	6,016	$	13,983		$	9,401
Net income per share-basic	$	0.22		$	0.17	$	0.39		$	0.28
Net income per share-diluted	$	0.21		$	0.17	$	0.38		$	0.27
Weighted average shares outstanding:
Basic	35,661			34,450		35,451			34,177
Diluted	36,618			35,374		36,478			35,099

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited, in thousands)



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Net income	$	7,789	$	6,016	$	13,983	$	9,401
Other comprehensive income:
Changes in fair value of foreign currency forward contract	—		—		—		(65		)
Foreign currency translation adjustment	87		5		119		(198		)
Other comprehensive income (loss)	87		5		119		(263		)
Comprehensive income	$	7,876	$	6,021	$	14,102	$	9,138

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)



	Six Months Ended June 30,
	2014			2013
Cash flows from operating activities:
Net income	$	13,983		$	9,401
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	9,391			9,244
Loss on disposal of fixed assets	202			141
Impairment of software development costs	—			1,759
Provision for receivable allowance	436			63
Share-based compensation expense	5,449			5,613
Income tax benefits from employee stock plans	3,058			739
Excess tax benefits from employee stock plans	(3,326		)	(1,258		)
Provision for excess and obsolete inventories	250			742
Deferred income taxes	860			(258		)
Changes in operating assets and liabilities:
Accounts receivable, net	(24,408		)	(8,757		)
Inventories	(335		)	(199		)
Prepaid expenses	2,144			(536		)
Other current assets	1,602			94
Non-current net investment in sales-type leases	622			160
Other assets	228			(129		)
Accounts payable	2,494			(796		)
Accrued compensation	(3,910		)	(374		)
Accrued liabilities	2,424			2,065
Deferred service revenue	2,640			(1,294		)
Deferred gross profit	10,788			4,578
Other long-term liabilities	829			230
Net cash provided by operating activities	25,421			21,228
Cash flows from investing activities:
Acquisition of intangible assets and intellectual property	(191		)	(64		)
Software development for external use	(5,507		)	(3,194		)
Purchases of property and equipment	(7,335		)	(5,711		)
Net cash used in investing activities	(13,033		)	(8,969		)
Cash flows from financing activities:
Proceeds from issuances under stock-based compensation plans	11,813			11,549
Employees' taxes paid related to restricted stock units	(1,729		)	—
Common stock repurchases	(4,069		)	—
Excess tax benefits from employee stock plans	3,326			1,258
Net cash provided by financing activities	9,341			12,807
Effect of exchange rate changes on cash and cash equivalents	119			(45		)
Net increase in cash and cash equivalents	21,848			25,021
Cash and cash equivalents at beginning of period	104,531			62,313
Cash and cash equivalents at end of period	$	126,379		$	87,334

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

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OMNICELL, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


Note 1.	Organization and Summary of Significant Accounting Policies

Description of the Company. Omnicell, Inc. ("Omnicell," "our," "us," "we," or the "Company") was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. Our major products are automated medication supply control systems and medical adherence solutions which are sold in our principal market, which is the healthcare industry. Our market is primarily located in the United States and Canada.

Basis of presentation. These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of Omnicell and our subsidiaries as of June 30, 2014, the results of our operations and comprehensive income for the three and six months ended June 30, 2014 and 2013 and our cash flows for the six months ended June 30, 2014 and 2013. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2013.

Our results of operations, comprehensive income for the three and six months ended June 30, 2014 and cash flows for the six months ended June 30, 2014 are not necessarily indicative of results that may be expected for the year ending December 31, 2014, or for any future period.

Use of estimates. GAAP requires management to make estimates and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, share-based compensation, inventory valuation, valuation of goodwill and purchased intangibles, valuation of long-lived assets and accounting for income taxes.

Principles of consolidation. The condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.

Concentration of credit risk. Financial instruments that may potentially subject us to concentrations of credit risk consist principally of cash equivalents and accounts receivable. Cash equivalents are maintained with several financial institutions and may exceed the amount of insurance provided on such balances. The majority of our accounts receivable are derived from sales to customers for commercial applications. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary but generally require no collateral. We maintain reserves for potential credit losses. Our products are broadly distributed and there was no single customer accounting for 10% or more of revenues in the three and six months ended June 30, 2014 and 2013. Additionally, there was no single customer accounting for 10% or more of accounts receivable at June 30, 2014 or December 31, 2013. We believe that we have no significant concentrations of credit risk at June 30, 2014.

Dependence on suppliers. We have a supply agreement with one primary supplier for construction and supply of several sub-assemblies and inventory management of sub-assemblies used in our hardware products. There are no minimum purchase requirements. The contract may be terminated by either the supplier or by us without cause and at any time upon delivery of two months’ notice. Purchases from this supplier for the three months ended June 30, 2014 and 2013 totaled approximately $8.3 million and $6.7 million, respectively, and $17.2 million and $13.9 million for the six months ended June 30, 2014 and 2013, respectively.

There have been no material changes in our significant accounting policies as of and for the three and six months ended June 30, 2014, compared to the significant accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2013.

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Recently Adopted Accounting Standards

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU 2013-11 requires an entity to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit, as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows: to the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. We adopted the amendments in ASU 2013-11 in the first quarter of 2014. This update did not have a significant impact on our financial position, operating results or cash flows.

Recently Issued Accounting Standards

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers: Topic 606. ASU 2014-09 supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration that is expected to be received for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing GAAP, including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Companies may use either of two methods: (i) full retrospective application to each prior reporting period presented with the option to elect certain practical expedients defined within ASU 2014-09; or (ii) modified retrospective application with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application and providing certain additional disclosures as defined per ASU 2014-09. ASU 2014-09 is effective for us in the first quarter of 2017 and we are currently evaluating the impact of our pending adoption on our consolidated financial statements.

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Note 2.	Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted average number of shares outstanding during the period, less shares subject to repurchase. Diluted net income per share is computed by dividing net income for the period by the weighted average number of shares, less shares subject to repurchase, plus, if dilutive, potential common stock outstanding during the period. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards and restricted stock units computed using the treasury stock method. Since their impact is anti-dilutive, we excluded 353,422 and 366,021 shares, respectively, from the calculations of diluted net income per share for the three and six months ended June 30, 2014 and 1,346,561 and 1,581,335 shares, respectively, from the same calculations for the three and six months ended June 30, 2013.

The calculation of basic and diluted net income per share is as follows (in thousands, except per share amounts):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Basic:
Net income	$	7,789	$	6,016	$	13,983	$	9,401
Weighted average shares outstanding — basic	35,661		34,450		35,451		34,177
Net income per share — basic	$	0.22	$	0.17	$	0.39	$	0.28
Diluted:
Net income	$	7,789	$	6,016	$	13,983	$	9,401
Weighted average shares outstanding — basic	35,661		34,450		35,451		34,177
Add: Dilutive effect of employee stock plans	957		924		1,027		922
Weighted average shares outstanding — diluted	36,618		35,374		$	36,478	35,099
Net income per share — diluted	$	0.21	$	0.17	$	0.38	$	0.27

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Note 3.	Cash and Cash Equivalents and Fair Value of Financial Instruments

Cash and cash equivalents consist of the following significant asset investment classes as of June 30, 2014 and December 31, 2013 (in thousands):



	June 30, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash / Cash Equivalents		Security Classification
Cash	$	68,333	$	—	$	—	$	68,333	$	68,333	N/A
Money market fund	58,046		—		—		58,046		58,046		Available for sale
Total cash and cash equivalents	$	126,379	$	—	$	—	$	126,379	$	126,379



c	December 31, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value		Cash / Cash Equivalents		Security Classification
Cash	$	38,823	$	—	$	—	$	38,823	$	38,823	N/A
Money market fund	65,708		—		—		65,708		65,708		Available for sale
Total cash and cash equivalents	$	104,531	$	—	$	—	$	104,531	$	104,531

The money market fund is a daily-traded cash equivalent with a price of $1.00, making it a Level 1 asset class, and its carrying cost closely approximates fair value. As demand deposit (cash) balances vary with the timing of collections and payments, the money market fund can cover any surplus or deficit, and thus is considered available-for-sale. We did not hold any Level 2 and Level 3 assets or liabilities as of June 30, 2014 and December 31, 2013.

The following table shows our financial assets measured at fair value, on a recurring basis, with money market funds recorded within cash and cash equivalents (in thousands):



	Quoted Prices in Active Markets for Identical Instruments (Level 1)		Total Fair Value
Money market fund at June 30, 2014	$	58,046	$	58,046
Money market fund at December 31, 2013	$	65,708	$	65,708


Note 4.	Inventories

Inventories consist of the following (in thousands):



	June 30, 2014		December 31, 2013
Raw materials	$	11,197	$	10,765
Work in process	745		534
Finished goods	19,600		20,158
Total	$	31,542	$	31,457

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Note 5.	Property and Equipment

Property and equipment consist of the following (in thousands):



	June 30, 2014			December 31, 2013
Equipment	$	41,876		$	40,180
Furniture and fixtures	5,609			5,260
Leasehold improvements	8,070			7,394
Purchased software	25,173			20,199
Construction in process	2,142			2,649
Total property and equipment	82,870			75,682
Accumulated depreciation and amortization	(45,613		)	(40,428		)
Total property and equipment, net	$	37,257		$	35,254

Depreciation and amortization of property and equipment was approximately $2.7 million and $2.9 million for the three months ended June 30, 2014 and 2013, respectively, and $5.2 million and $5.6 million for the six months ended June 30, 2014 and 2013, respectively.

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Note 6.	Net Investment in Sales-Type Leases

Our sales-type leases are for terms generally up to five years. Sales-type lease receivables are collateralized by the underlying equipment. The components of our net investment in sales-type leases are as follows (in thousands):



	June 30, 2014			December 31, 2013
Net minimum lease payments to be received	$	17,559		$	18,172
Less unearned interest income portion	(1,214		)	(1,455		)
Net investment in sales-type leases	16,345			16,717
Less current portion(1)	(5,473		)	(5,232		)
Non-current net investment in sales-type leases(2)	$	10,872		$	11,485

(1) A component of other current assets. This amount is net of an immaterial allowance for doubtful accounts as of June 30, 2014 and December 31, 2013.

(2) This amount is net of an immaterial allowance for doubtful accounts as of June 30, 2014 and December 31, 2013.

The minimum lease payments under sales-type leases as of June 30, 2014 were as follows (in thousands):



Remainder of 2014	$	3,137
2015	5,438
2016	4,102
2017	3,154
2018	1,576
Thereafter	152
Total	$	17,559

The following table summarizes the credit losses and recorded investment in sales-type leases, excluding unearned interest (in thousands):



	Allowance for Credit Losses		Recorded Investment in Sales-type Leases Gross		Recorded Investment in Sales-type Leases Net
Credit loss disclosure for June 30, 2014:
Accounts individually evaluated for impairment	$	—	$	—	$	—
Accounts collectively evaluated for impairment	157		16,502		16,345
Ending balances: June 30, 2014	$	157	$	16,502	$	16,345

Credit loss disclosure for December 31, 2013:
Accounts individually evaluated for impairment	$	—	$	—	$	—
Accounts collectively evaluated for impairment	167		16,884		16,717
Ending balances: December 31, 2013	$	167	16,884		$	16,717

The following table summarizes the activity for the allowance for credit losses for the investment in sales-type leases (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Allowance for credit losses, beginning of period	$	169		$	190		$	167		$	607
Current period provision (reversal)	(12		)	6			(10		)	19
Direct write-downs charged against the allowance	—			—			—			(413		)
Recoveries of amounts previously charged off	—			(12		)	—			(29		)
Allowance for credit losses, end of period	$	157		$	184		$	157		$	184

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Note 7.	Goodwill and Intangible Assets

Goodwill

Goodwill is tested for impairment at least annually or more frequently if events or circumstances indicate that an impairment loss may have occurred, and we write down these assets when impaired. We perform our annual impairment tests during the fourth quarter of each fiscal year using the closing balance sheet as of the last day of the third quarter.

During the six months ended June 30, 2014, we noted no indications of impairment or triggering events to cause us to perform a goodwill impairment analysis.

There were no changes in the carrying amount of goodwill for the period from December 31, 2013 to June 30, 2014. Goodwill by reporting unit, which is the same for our operating segments, is as follows (in thousands):



	Goodwill at December 31, 2013		Adjustments to Goodwill		Goodwill at June 30, 2014
Reporting units:
Automation and Analytics	$	28,543	$	—	$	28,543
Medication Adherence	82,800		—		82,800
Total	$	111,343	$	—	$	111,343

Intangible Assets, net

There were no indefinite-lived intangible assets as of June 30, 2014 or December 31, 2013. Finite-lived intangible assets consist of the following (in thousands):



	June 30, 2014						December 31, 2013
	Gross				Net		Gross				Net
	Carrying Amount		Accumulated Amortization		Carrying Amount		Carrying Amount		Accumulated Amortization		Carrying Amount		Amortization Life
Finite-lived intangibles:
Customer relationships	$	54,730	$	6,314	$	48,416	$	54,730	$	5,236	$	49,494	5-30 years
Acquired technology	27,580		3,333		24,247		27,580		2,598		24,982		3-20 years
Patents	1,613		319		1,294		1,493		254		1,239		20 years
Trade name	6,890		1,286		5,604		6,890		1,003		5,887		3-12 years
Non-compete agreements	—		—		—		60		60		—		3 years
Total finite-lived intangibles	$	90,813	$	11,252	$	79,561	$	90,753	$	9,151	$	81,602

Amortization expense for the intangible assets presented above was $1.1 million for both the three months ended June 30, 2014 and 2013, and $2.2 million and $2.1 million for the six months ended June 30, 2014 and 2013, respectively. The amortization of acquired technology is included within product cost of sales and amortization of other acquired intangibles is included within selling, general and administrative expenses.

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Estimated future amortization expense of finite-lived intangible assets are as follows (in thousands):



Remainder of 2014	$	2,127
2015	4,225
2016	3,857
2017	3,822
2018	3,714
Thereafter	61,816
Total	$	79,561

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Note 8.	Accrued Liabilities

Accrued liabilities consist of the following (in thousands):



	June 30, 2014		December 31, 2013
Rebates and lease buyouts	$	4,596	$	1,699
Advance payments from customers	3,656		4,971
Accrued Group Purchasing Organization (GPO) fees(1)	2,848		2,324
Technology license purchase obligation, current portion	500		1,500
Taxes payable	2,719		1,664
Other	1,851		1,588
Total	$	16,170	$	13,746

(1) Fees paid pursuant to GPO agreements. Customers who buy our products pursuant to a GPO agreement obtain pre-negotiated contract terms and pricing.

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Note 9.	Deferred Gross Profit

Deferred gross profit consists of the following (in thousands):



	June 30, 2014			December 31, 2013
Sales of medication and supply dispensing systems and packaging equipment(1)	$	40,748		$	29,040
Cost of revenues, excluding installation costs	(10,003		)	(9,083		)
Deferred gross profit	$	30,745		$	19,957

(1) Sales that have been delivered and invoiced and not yet installed, or sales that have been shipped and not invoiced and not yet installed.


Note 10.	Commitments

We lease properties in California, Florida, Illinois, Tennessee, and the United Kingdom. We also have smaller rented offices in Ohio, the United Arab Emirates, the People's Republic of China and the Federal Republic of Germany.

At June 30, 2014, the minimum payments under our operating leases for each of the five succeeding fiscal years were as follows (in thousands):



Remainder of 2014	$	2,926
2015	5,583
2016	5,167
2017	4,468
2018	4,298
Thereafter	16,600
Total	$	39,042

We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. Our near-term commitments to our contract manufacturers and suppliers totaled $11.3 million as of June 30, 2014.

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Note 11.	Contingencies

Legal Proceedings

We may from time to time become involved in certain legal proceedings in the ordinary course of business. We are not a party to any legal proceedings that management believes may have a material impact on Omnicell's financial position or results of operations.

Guarantees

As permitted under Delaware law and our certificate of incorporation and bylaws, we have agreed to indemnify our directors and officers against certain losses that they may suffer by reason of the fact that such persons are, were or become our directors or officers. The term of the indemnification period is for the director’s or officer’s lifetime and there is no limit on the potential amount of future payments that we could be required to make under these indemnification agreements. We have purchased a directors’ and officers’ liability insurance policy that may enable us to recover a portion of any future payments that we may be required to make under these indemnification agreements. Assuming the applicability of coverage and the willingness of the insurer to assume coverage and subject to certain retention, loss limits and other policy provisions, we believe it is unlikely that we will be required to pay any material amounts pursuant to these indemnification obligations. However, no assurances can be given that the insurers will not attempt to dispute the validity, applicability or amount of coverage without expensive and time-consuming litigation against the insurers.

Additionally, we undertake indemnification obligations in our ordinary course of business in connection with, among other things, the licensing of our products and the provision of our support services. In the ordinary course of our business, we have in the past and may in the future agree to indemnify another party, generally our business affiliates or customers, against certain losses suffered or incurred by the indemnified party in connection with various types of claims, which may include, without limitation, claims of intellectual property infringement, certain tax liabilities, our gross negligence or intentional acts in the performance of support services and violations of laws. The term of these indemnification obligations is generally perpetual. In general, we attempt to limit the maximum potential amount of future payments that we may be required to make under these indemnification obligations to the amounts paid to us by a customer, but in some cases the obligation may not be so limited. In addition, we have in the past and may in the future warrant to our customers that our products will conform to functional specifications for a limited period of time following the date of installation (generally not exceeding 30 days) or that our software media is free from material defects. Sales contracts for certain of our medication packaging systems often include limited warranties for up to six months, but the periodic activity and ending warranty balances we record have historically been immaterial.

From time to time, we may also warrant that our professional services will be performed in a good and workmanlike manner or in a professional manner consistent with industry standards. We generally seek to disclaim most warranties, including any implied or statutory warranties such as warranties of merchantability, fitness for a particular purpose, title, quality and non-infringement, as well as any liability with respect to incidental, consequential, special, exemplary, punitive or similar damages. In some states, such disclaimers may not be enforceable. If necessary, we would provide for the estimated cost of product and service warranties based on specific warranty claims and claim history. We have not been subject to any significant claims for such losses and have not incurred any material costs in defending or settling claims related to these indemnification obligations. Accordingly, we believe it is unlikely that we will be required to pay any material amounts pursuant to these indemnification obligations or potential warranty claims and, therefore, no material liabilities have been recorded for such indemnification obligations as of June 30, 2014 or December 31, 2013.


Note 12.	Stockholders’ Equity

Treasury Stock

2012 Stock Repurchase Program

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

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For the six months ended June 30, 2014, we repurchased a total of $4.1 million or 145,737 shares, at an average cost of $27.92, including commissions. For details regarding our 2012 Stock Repurchase Program, please refer to Note 15, Stockholders' Equity, of our Annual Report on Form 10-K for the year ended December 31, 2013.

From the inception of the 2012 Repurchase Program, we have repurchased a total of $25.0 million, or 1,030,382 shares at an average cost of $24.29 per share, including commissions. As of June 30, 2014, the maximum dollar value of shares that may yet be purchased under the plan is $25.0 million.


Note 13.	Stock Option Plans and Share-Based Compensation

Share-Based Plans

Equity Incentive Plan

For a detailed explanation of our stock plan and subsequent changes please refer to Note 16, Stock Option Plans, Share-Based Compensation and 401(k) Plan, of our Annual Report on Form 10-K for the year ended December 31, 2013.

At June 30, 2014, 2,361,284 shares of common stock were reserved for future issuance our 2009 Equity Incentive Plan, as amended (the "2009 Plan"), and $5.9 million of total unrecognized compensation cost related to non-vested stock options was expected to be recognized over a weighted average period of 2.7 years.

A summary of option activity under the 2009 Plan for the six months ended June 30, 2014 is presented below:



Options:	Number of Shares		Weighted-Average Exercise Price
	(in thousands)
Outstanding at December 31, 2013	3,143		$15.82
Granted	304		$25.75
Exercised	(582	)	$14.29
Forfeited	(59	)	$18.56
Expired	(7	)	$17.47
Outstanding at June 30, 2014	2,799		$17.15
Vested and expected to vest at June 30, 2014	2,770		$17.10
Exercisable at June 30, 2014	1,727		$15.39

The aggregate intrinsic value of options exercised under our stock plans for the three and six months ended June 30, 2014 was $5.3 million and $7.9 million, respectively, determined as of the date of option exercise.

Restricted Stock and Restricted Stock Units

A summary of activity of both restricted stock and restricted stock units ("RSUs") for the six months ended June 30, 2014 is presented below:



	Restricted Stock			Restricted Stock Units
	Number of Shares		Weighted-Average Grant Date Fair Value Per Share	Number of Shares		Weighted-Average Grant Date Fair Value Per Share
	(in thousands)			(in thousands)
Non-vested, December 31, 2013	52		$18.43	362		$17.15
Granted	39		$26.46	98		$25.56
Vested	(54	)	$26.47	(84	)	$16.54
Forfeited	—		$0.00	(16	)	$15.83
Non-vested, June 30, 2014	37		$26.47	360		$19.64

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The fair value of restricted stock is the product of the number of shares granted and the closing market price of our common stock on the grant date. Our unrecognized compensation cost related to non-vested restricted stock is approximately $6.3 million and is expected to be recognized over a weighted-average period of 2.5 years.

Performance-Based Restricted Stock Units

Performance-based restricted stock units ("PSUs") are an element of our executive compensation plans. In 2012, we granted 125,000 PSUs to our executive officer of which 62,500 became eligible for vesting upon the achievement of a certain level of shareholder return for 2012 as described below. In 2013, we granted 137,500 PSUs to our executive officers, all of which became eligible for vesting upon the achievement of a certain level of shareholder return for the period from January 1, 2013 through February 28, 2014, as described below. In 2014, we granted 132,500 PSUs to our executive officers, all, none or a portion of which may become eligible for vesting depending on the level of shareholder return for 2014 and eligibility for further time-based vesting based on the ranking of our total shareholder return. For a more detailed explanation of our PSUs and subsequent changes, please refer to Note 16, Stock Option Plans, Share-Based Compensation and 401(k) Plan on our Annual Report on Form 10-K for the year ended December 31, 2013.

Our unrecognized compensation cost related to non-vested performance-based restricted stock units at June 30, 2014 was approximately $2.3 million and is expected to be recognized over a weighted-average period of 1.5 years. For the three months ended June 30, 2014 and 2013, we recognized $0.5 million and $0.4 million, respectively, of compensation expense for the PSUs. For the six months ended June 30, 2014 and 2013, we recognized $1.0 million and $0.8 million, respectively, of compensation expense for the PSUs.

The following table shows the percent of PSUs granted in 2012 eligible for further time-based vesting based on our percentile placement:



Percentile Placement of Our Total Shareholder Return	% of PSUs Eligible for Time- Based Vesting
Below the 35th percentile	—%
At least the 35th percentile, but below the 50th percentile	50%
At least the 50th percentile	100%

On January 22, 2013, the Compensation Committee of our Board of Directors ("the Compensation Committee") confirmed 35.3% as the percentile rank of Omnicell's 2012 total stockholder return. This resulted in 50% of the 2012 PSU awards, or 62,500 shares, as eligible for further time-based vesting. The eligible performance-based restricted stock unit awards will vest as follows: 25% of the eligible shares vested immediately on January 22, 2013 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service.

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The following table shows the percent of PSUs granted in 2013 eligible for further time-based vesting based on our percentile placement:



Percentile Placement of Our Total Shareholder Return	% of PSUs Eligible for Time- Based Vesting
Below the 35th percentile	—%
At least the 35th percentile, but below the 50th percentile	50%
At least the 50th percentile	100%

On March 20, 2014, the Compensation Committee confirmed 63.94% as the percentile rank of Omnicell's 2013-2014 total stockholder return. This resulted in 100% of the 2013 PSU awards, or 137,500 shares, as eligible for further time-based vesting. The eligible performance-based restricted stock unit awards will vest as follows: 25% of the eligible shares vested immediately on March 20, 2014 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service.

On February 5, 2014, the Compensation Committee approved PSU awards of 132,500 shares. If the minimum performance threshold is met as determined by the Compensation Committee in 2015, the eligible performance-based restricted stock unit awards will vest as follows: 25% of the eligible shares will vest immediately, with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service.

A summary of activity of the PSUs for the six months ended June 30, 2014 is presented below:



Performance-based Stock Units	Number of Shares		Weighted-Average Grant Date Fair Value Per Share
	(in thousands)
Non-vested, December 31, 2013	225		$13.32
Granted	135		$16.49
Vested	(74	)	$13.66
Forfeited	(8	)	$10.93
Non-vested, June 30, 2014	278		$14.72

1997 Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan (the “ESPP”) under which employees can purchase shares of our common stock based on a percentage of their compensation, but not greater than 15% of their earnings, up to a maximum of $25,000 of fair value per year. The purchase price per share must be equal to the lower of 85% of the fair value of the common stock at the beginning of a 24-month offering period or the end of each six-month purchasing period.

At the 2009 Annual Meeting of Stockholders, the stockholders approved an amendment to the ESPP, which added 2,622,426 shares to the reserve for future issuance. As of June 30, 2014, there were 846,891 shares reserved for future issuance under the ESPP. For the three months ended June 30, 2014, no shares of common stock were purchased under the ESPP. For the six months ended June 30, 2014, 254,009 shares of common stock were purchased under the ESPP.

As of June 30, 2014, our unrecognized compensation cost related to the shares to be purchased under our ESPP was approximately $0.9 million and is expected to be recognized over a weighted average period of approximately 1.0 year.

Share-based Compensation

We account for share-based awards granted to employees and directors, including employee stock option awards, restricted stock, PSUs and RSUs issued pursuant to the 2009 Plan and employee stock purchases made under our ESPP using the estimated grant date fair value method of accounting in accordance with ASC 718, Stock Compensation.

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We value options and ESPP shares using the Black-Scholes-Merton option-pricing model. Restricted stock and time-based RSUs are valued at the grant date fair value of the underlying common shares. The PSUs are valued via Monte Carlo simulation.

The following table shows a summary of the share-based compensation expense included in the condensed consolidated statements of operations (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Cost of revenues	$	264	$	324	$	532	$	629
Research and development	380		326		749		615
Selling, general and administrative	2,076		2,037		4,168		4,369
Total share-based compensation expenses	$	2,720	$	2,687	$	5,449	$	5,613

Note 14. Segments

Prior to the first quarter of 2014, we organized our business into two operating business segments, the Acute Care and Non-Acute Care segments, which were based on the products' target customers. The Acute Care segment primarily included products and services sold to hospital customers, and the Non-Acute Care segment primarily included products and services sold to customers outside of hospital settings.

In the first quarter of 2014, we realigned our segments based on the products we sell, regardless of who they are sold to because our business has evolved to be managed more on a product basis, rather than on a customer-type basis. It has become more difficult to determine whether a customer is a hospital or a blend of hospitals and non-acute care facilities. We are at a point where many of our Acute Care and Non-Acute Care customers are converging to provide services across the continuum of care. These customers seek automation and analytics products that function across the various facilities they manage. We find ourselves providing solutions across multiple types of care environments. These customers are also interested in obtaining higher levels of adherence to prescribed medication regimens that our blister card products provide.

Our two reportable segments are the Automation and Analytics segment and the Medication Adherence segment. 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 Medication Adherence segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services.

Prior period amounts in the tables below have been recast to conform to the way we internally manage and monitor performance at the segment level during the current period.

We report segment information based on the management approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (the "CODM") for making decisions and assessing performance as the source of our operating segments. The CODM is our Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment, using information about its revenues, gross profit and income (loss) from operations. The CODM does not evaluate operating business segments using discrete asset information; accordingly, we do not report segment assets.

Since 1992, Omnicell has provided automation and business information solutions to healthcare facilities in general, but with a focus on acute care hospitals. We have developed product solutions that help optimize various workflows utilized in hospitals. We have also developed sophisticated sales, installation, and service capabilities to serve the specific and special needs of hospitals. As the healthcare market evolves, acute care facilities are beginning to merge operationally with non-acute care facilities. The new healthcare organizations desire medication and supply inventory control and business analytics across the continuum of care environments they serve. Our Automation and Analytics segment represents the products we sell to fulfill these needs.

Since 1984, MTS has provided medication adherence solutions to the non-acute care market. In 2012, we acquired MTS. The solutions supplied by MTS provide automated and semi-automated equipment to assist institutional and retail pharmacists in filling medication orders into blister cards, the primary method of medication control in non-acute care settings. Completing the product solution are the consumables used by institutional and retail pharmacists to make the medication adherence package. MTS has developed process manufacturing capabilities as well as sales capabilities to market medication adherence solutions to institutional and retail pharmacies. As healthcare evolves, these medication adherence solutions are

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finding application in acute care settings as well. Our Medication Adherence segment represents all the products we sell to fulfill medication adherence needs through blister cards, blister card packaging equipment, and related software.

The contributions of our operating segments to net revenues and income from operations, and the reconciliation to total net income, were as follows (amounts in thousands):



	Three Months Ended June 30, 2014									Three Months Ended June 30, 2013
	Automation and Analytics			Medication Adherence			Total			Automation and Analytics			Medication Adherence			Total
Total revenues	$	84,702		$	20,350		$	105,052		$	73,866		$	19,820		$	93,686
Cost of revenues	35,992			13,020			49,012			31,936			12,382			44,318
Gross profit	$	48,710		$	7,330		$	56,040		$	41,930		$	7,438		$	49,368
Gross margin %	57.5		%	36.0		%	53.3		%	56.8		%	37.5		%	52.7		%

Operating expenses	36,508			6,974			43,482			33,808			6,201			40,009
Income from operations	$	12,202		$	356		$	12,558		$	8,122		$	1,237		$	9,359
Operating margin %	14.4		%	1.7		%	12.0		%	11.0		%	6.2		%	10.0		%

Interest and other income (expense), net							(40		)							63
Income before provision for income taxes							12,518									9,422
Provision for income taxes							4,729									3,406
Net income							$	7,789								$	6,016



	Six Months Ended June 30, 2014									Six Months Ended June 30, 2013
	Automation and Analytics			Medication Adherence			Total			Automation and Analytics			Medication Adherence			Total
Total revenues	$	166,201		$	40,615		$	206,816		$	142,579		$	38,217		$	180,796
Cost of revenues	70,932			25,349			96,281			62,212			23,849			86,061
Gross profit	$	95,269		$	15,266		$	110,535		$	80,367		$	14,368		$	94,735
Gross margin %	57.3		%	37.6		%	53.4		%	56.4		%	37.6		%	52.4		%

Operating expenses	73,910			14,113			88,023			66,912			14,296			81,208
Income from operations	$	21,359		$	1,153		$	22,512		$	13,455		$	72		$	13,527
Operating margin %	12.9		%	2.8		%	10.9		%	9.4		%	0.2		%	7.5		%

Interest and other income (expense), net							(296		)							(159		)
Income before provision for income taxes							22,216									13,368
Provision for income taxes							8,233									3,967
Net income							$	13,983								$	9,401

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Segment depreciation and amortization, and capital expenditures were as follows (amounts in thousands):



	Three Months Ended June 30, 2014						Three Months Ended June 30, 2013
	Automation and Analytics		Medication Adherence		Total		Automation and Analytics		Medication Adherence		Total
Depreciation and amortization	$	3,044	$	1,735	$	4,779	$	2,963	$	1,809	$	4,772
Capital expenditures	$	4,419	$	365	$	4,784	$	1,018	$	1,395	$	2,413



	Six Months Ended June 30, 2014						Six Months Ended June 30, 2013
	Automation and Analytics		Medication Adherence		Total		Automation and Analytics		Medication Adherence		Total
Depreciation and amortization	$	5,942	$	3,449	$	9,391	$	5,862	$	3,382	$	9,244
Capital expenditures	$	6,167	$	1,168	$	7,335	$	2,018	$	3,733	$	5,751

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Note 15. Impairment of Software Development Costs

2013 Impairment

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

Note 16. Credit Agreement

In September 2013, we entered into a credit agreement (the "Credit Agreement") with Wells Fargo Bank, National Association, as administrative agent, and the lenders from time to time thereto. The Credit Agreement provides for a $75.0 million revolving credit facility with a $10.0 million letter of credit sub-limit. Loans under the Credit Agreement mature on September 25, 2018. The Credit Agreement permits us to request one or more increases in the aggregate commitments provided that such increases do not exceed $25.0 million in the aggregate. We expect to use the proceeds from any revolving loans under the credit facility for general corporate purposes, including future acquisitions. Our obligations under the Credit Agreement are guaranteed by certain of our domestic subsidiaries and secured by substantially all of our and the subsidiary guarantors’ assets.

Amounts drawn under the Credit Agreement bear interest, at our election, at a Eurodollar rate plus a margin of 1.75% per annum, or an alternate base rate equal to the highest of (a) the prime rate, (b) the federal funds rate plus 0.50%, and (c) LIBOR for an interest period of one month plus 1.75%. We are required to pay a commitment fee of 0.25% per annum on the aggregate undrawn amount of the commitments under the credit facility.

The Credit Agreement contains customary affirmative and negative covenants, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, dividends and other distributions. The Credit Agreement contains financial covenants that require us to, among other things, maintain a maximum consolidated total leverage ratio and a minimum consolidated fixed charge coverage ratio, in each case, as of the last day of each fiscal quarter.

To date, we have not yet drawn any funds under the credit facility. We were in full compliance with all covenants at June 30, 2014 and for all periods since the commencement of the Credit Agreement.

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Note 17. Income Taxes

We provide for income taxes for each interim period based on the estimated annual effective tax rate for the year, adjusting for discrete items in the quarter in which they arise. The annual effective tax rate before discrete items was 39.2% and 38.7% for the six months ended June 30, 2014 and 2013, respectively. The 2014 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.

The 2013 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 federal research and development credit claimed and the domestic production activities deduction.

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

Forward-Looking Statements

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


•	our ability to align our cost structure and headcount with our current business expectations;


•	the operating margins or earnings per share goals we may set;


•	our ability to protect our intellectual property and operate our business without infringing upon the intellectual property rights of others;


•	our ability to generate cash from operations and our estimates regarding the sufficiency of our cash resources; and


•	our ability to acquire companies, businesses, products or technologies on commercially reasonable terms and integrate such acquisitions effectively.

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. We discuss many of these risks in this Quarterly Report on Form 10-Q 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 on Form 10-Q. You should read our Annual Report on Form 10-K and the documents that we reference in the Annual Report on Form 10-K 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, Inc.," "Omnicell," "our," "us," "we," or the "Company" collectively refer to Omnicell, Inc., a Delaware corporation, and 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

We are a leading provider of automated solutions for medication and supply management in healthcare. We believe our products improve healthcare for everyone, and it is our mission to continue improving healthcare with solutions that change the practice of healthcare in ways that improve patient and provider outcomes. Our automation and analytics solutions are designed to enable healthcare facilities to acquire, manage, dispense and administer medications and medical-surgical supplies and are intended to enhance patient safety, reduce medication errors, reduce operating costs, improve workflow and increase operational efficiency. We sell our medication control systems together with related consumables and services, and medical and surgical supply control systems. We generate approximately 89% of our product revenue in the United States and Canada. However, we expect our revenue 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.

Prior to the first quarter of 2014, we managed our business in two customer-centric operating segments: Acute Care which primarily included products and services sold to hospital customers, and Non-Acute Care which primarily included products and services sold to customers outside of hospital settings.

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In the first quarter of 2014, we began to manage our business according to two product segments because many of our Acute Care and Non-Acute Care customers are converging to provide services across the continuum of care. These customers seek Automation and Analytics products that function across the various facilities they manage and we find ourselves providing solutions across multiple types of care environments. These customers are also interested in obtaining higher levels of adherence to prescribed medication regimens that our blister card products provide. Our business has evolved to be managed more on a product basis and it has become more difficult to determine whether a customer is a hospital or a blend of hospitals and non-acute care facilities. Our two product segments are Automation and Analytics and Medication Adherence. 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 Medication Adherence segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services.

Our Automation and Analytics segment has been the predominant market for our products since the company's inception in 1992 and today comprises approximately 80% of our overall business. The Medication Adherence segment became a significant portion of our business in May 2012, when we completed our acquisition of MedPak Holdings, Inc. ("MedPak"). MedPak is the parent company of MTS Medication Technologies, Inc. ("MTS"), a worldwide provider of medication adherence packaging systems. The acquisition aligned us with the long-term trends of the healthcare market to manage the health of patients across the continuum of care. The combination of Omnicell and MTS brought capabilities to each other that strengthened the product lines and expanded the medication management coverage of both companies. As our business evolves, we will continue to assess our segments which could result in future modifications to the current presentation.

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 invested in strategies which we believe have generated our revenue and earnings growth by directly supporting our customers’ initiatives. 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 assure those investments provide the solutions most valuable to our customers.

•

Deliver our solutions to new markets. Areas of healthcare where work is done manually may benefit from our existing solutions. These areas include hospitals that continue to utilize manual operations, healthcare segments of the US 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 aspect to our historical and future success.

Our investments have been consistent with the strategies outlined above. To differentiate our solutions from others available in the market, we began shipping a refresh of our product line in 2011 which we market as G4. The G4 refresh included multiple new products and an upgrade product that allowed existing customers to augment their installations to obtain the most current technology that we provide. The G4 product refresh has been a key contributor to our growth, with 46% of our automation and analytics installed base ordering upgrades to their existing systems since the announcement of G4. In addition to enhanced capabilities, we have focused on attaining the highest quality and service measurements for G4 in the industry, while marketing the solution to new and existing customers. Our research and development efforts today are designed to bring new products to market beyond the G4 product line that we believe will meet customer needs in years to come.

Consistent with our strategy to enter new markets, we have made investments in our selling, general and administrative expenses to expand our sales team and market to new customers. Our international efforts have focused primarily on three markets: China, where we made a Mandarin version of our automated dispensing systems available in 2011, the Middle Eastern countries of the Arabian Peninsula where new healthcare facility construction is taking place, and in the United Kingdom where, in the third quarter of 2012, we purchased 15% of our United Kingdom distributor’s outstanding equity for approximately $0.9 million in cash to accelerate the adoption of medication and supply automation. In connection with the investment, we have the right, under certain circumstances, to appoint a member to this company's board of directors

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as well as certain other voting rights and, therefore, we believe we have the ability to exert significant influence over this distributor's operations. Our proportionate equity share of the income of this distributor recognized in our financial statements for the three and six months ended June 30, 2014 was immaterial. We have also expanded our sales efforts to medication adherence customers in the United States which has allowed us to sell our automated dispensing solutions and other products to this market.

Expansion of our solutions through acquisitions and partnerships include our acquisition of MTS in 2012 and an announced, but not completed, potential acquisition of Surgichem Limited from Bupa Care Homes (CFG) Plc. Surgichem is a provider of medication adherence products in the United Kingdom. If completed, the combination of Surgichem with Omnicell is expected to enable both entities to sell their lines of proven multi- and single-dose products across a broader medication adherence packaging market in the United Kingdom. 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, the quality and availability of healthcare services increases;


•	Our expectation that the environment of increased patient safety awareness, increased regulatory control and increased need for workflow efficiency through the adoption of technology in the healthcare industry will make our solutions a priority in the capital budgets of healthcare facilities; and


•	Our belief that healthcare customers will continue to value a consultative customer experience from their suppliers.

Among other financial measures, we utilize product bookings to assess the current success of our strategies. Product bookings consist of all firm orders, as evidenced by a contract and purchase order for equipment and software, and by a purchase order for consumables. Equipment and software bookings are installable within 12 months and generally recorded as revenue upon customer acceptance of the installation. Consumables are recorded as revenue upon shipment to a customer or receipt by the customer, depending upon contract terms. Consumable bookings are generally recorded as revenue within one month.

In addition to product solution sales, we provide services to our customers. Our healthcare customers expect a high degree of partnership involvement from their technology suppliers throughout their ownership of the products. We provide extensive installation planning and consulting as part of every product sale and included in the initial price of the solution. Our customers' medication control systems are mission critical to their success and our customers require these systems to be functional at all times. To help assure the maximum availability of our systems, our customers typically purchase maintenance and support contracts in one, two or five year increments.

The growth in our Automation and Analytics revenue for the three and six months ended June 30, 2014 was driven primarily by our success in consistently growing the number of our customer installations. Installed customers grew from 1,783 hospitals as of June 30, 2013 to 1,886 hospitals as of June 30, 2014. To a lesser extent, but of equal importance, revenue growth was also driven by our success in upgrading installed customers to newer G4 technology, which is in line with our strategy of striving to deliver differentiated innovation in our solutions. Our larger installed base has provided growth opportunities and, as a result, our service revenues have also grown for the six months ended June 30, 2014.

The growth in our Medication Adherence revenue for the three and six months ended June 30, 2014 was driven primarily by increased sales of our OnDemand medication packaging systems in the United States market and increased adoption of multi-medication adherence solutions used by patients in assisted living or home care in Europe. This growth is in line with our strategy to deliver solutions to markets outside the United States. On a geographic basis, the United States market did not contribute to, nor erode, the growth in our Medication Adherence business as the population of patients living in nursing homes in the United States has remained relatively constant over the past twelve months.

We strive to provide the best service possible, as measured by third party rating agencies and by our own surveys. Our long-term liabilities include long-term deferred service revenue of $21.3 million and $17.8 million as of June 30, 2014 and December 31, 2013, respectively. Our deferred service revenue will be amortized to service revenue as the service contracts are performed upon.

In the future, we expect our strategies to evolve as the business environment of our customers evolves, but our focus will remain on improving healthcare with solutions that improve patient and provider outcomes. We expect our investment in

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differentiated products, new markets, and acquisitions and partnerships to continue. For the remainder of 2014, we also intend to continue to manage our business to operating profit margins similar to what we have achieved in the first half of the year.

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Results of Operations

The table below shows the components of our consolidated results of operations as percentages of total revenues for the three and six months ended June 30, 2014 and 2013 (in thousands, except percentages):



	Three Months Ended
	June 30, 2014					June 30, 2013
	$			% of Revenue		$		% of Revenue
Revenues:
Product revenue	$	85,244		81.1	%	$	75,581	80.7	%
Service and other revenues	19,808			18.9	%	18,105		19.3	%
Total revenues	105,052			100.0	%	93,686		100.0	%
Cost of revenues:
Cost of product revenues	41,003			39.0	%	36,286		38.7	%
Cost of service and other revenues	8,009			7.6	%	8,032		8.6	%
Total cost of revenues	49,012			46.7	%	44,318		47.3	%
Gross profit	56,040			53.3	%	49,368		52.7	%
Operating expenses:
Research and development	6,471			6.2	%	7,150		7.6	%
Selling, general and administrative	37,011			35.2	%	32,859		35.1	%
Total operating expenses	43,482			41.4	%	40,009		42.7	%
Income from operations	12,558			12.0	%	9,359		10.0	%
Interest and other income (expense), net	(40		)	—	%	63		0.1	%
Income before provision for income taxes	12,518			11.9	%	9,422		10.1	%
Provision for income taxes	4,729			4.5	%	3,406		3.6	%
Net income	$	7,789		7.4	%	$	6,016	6.5	%

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	Six Months Ended
	June 30, 2014					June 30, 2013
	$			% of Revenue		$			% of Revenue
Revenues:
Product revenue	$	167,824		81.1	%	$	144,817		80.1	%
Service and other revenues	38,992			18.9	%	35,979			19.9	%
Total revenues	206,816			100.0	%	180,796			100.0	%
Cost of revenues:
Cost of product revenues	79,903			38.6	%	69,833			38.6	%
Cost of service and other revenues	16,378			7.9	%	16,228			9.0	%
Total cost of revenues	96,281			46.6	%	86,061			47.6	%
Gross profit	110,535			53.4	%	94,735			52.4	%
Operating expenses:
Research and development	12,592			6.1	%	15,104			8.4	%
Selling, general and administrative	75,431			36.5	%	66,104			36.6	%
Total operating expenses	88,023			42.6	%	81,208			45.0	%
Income from operations	22,512			10.9	%	13,527			7.5	%
Interest and other income (expense), net	(296		)	(0.1	)%	(159		)	(0.1	)%
Income before provision for income taxes	22,216			10.7	%	13,368			7.4	%
Provision for income taxes	8,233			4.0	%	3,967			2.2	%
Net income	$	13,983		6.8	%	$	9,401		5.2	%

We anticipate our revenues will continue to increase in 2014 compared to the same periods in 2013, as we fulfill our existing orders. 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 and 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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Operations by Segment During the Three and Six Months Ended June 30, 2014



	Three Months Ended June 30, 2014									Three Months Ended June 30, 2013
	Automation and Analytics			Medication Adherence			Total			Automation and Analytics			Medication Adherence			Total
Total revenues	$	84,702		$	20,350		$	105,052		$	73,866		$	19,820		$	93,686
Cost of revenues	35,992			13,020			49,012			31,936			12,382			44,318
Gross profit	48,710			7,330			56,040			41,930			7,438			49,368
Gross margin %	57.5		%	36.0		%	53.3		%	56.8		%	37.5		%	52.7		%

Operating expenses	36,508			6,974			43,482			33,808			6,201			40,009
Income (loss) from operations	$	12,202		$	356		$	12,558		$	8,122		$	1,237		$	9,359
Operating margin %	14.4		%	1.7		%	12.0		%	11.0		%	6.2		%	10.0		%

Total revenues grew 12.1% for the three months ended June 30, 2014 compared with the same period last year. Overall product and service gross margins increased by 0.6 points for the three months ended June 30, 2014 compared to the same period in 2013 based upon improvement in Automation and Analytics and partially offset by a decline in Medication Adherence. Income from operations increased primarily on the performance of the Automation and Analytics segment.



	Six Months Ended June 30, 2014									Six Months Ended June 30, 2013
	Automation and Analytics			Medication Adherence			Total			Automation and Analytics			Medication Adherence			Total
Total revenues	$	166,201		$	40,615		$	206,816		$	142,579		$	38,217		$	180,796
Cost of revenues	70,932			25,349			96,281			62,212			23,849			86,061
Gross profit	95,269			15,266			110,535			80,367			14,368			94,735
Gross margin %	57.3		%	37.6		%	53.4		%	56.4		%	37.6		%	52.4		%

Operating expenses	73,910			14,113			88,023			66,912			14,296			81,208
Income (loss) from operations	$	21,359		$	1,153		$	22,512		$	13,455		$	72		$	13,527
Operating margin %	12.9		%	2.8		%	10.9		%	9.4		%	0.2		%	7.5		%

Total revenues grew 14.4% for the six months ended June 30, 2014 compared with the same period last year. Overall product and service gross margins increased by 1.0 point for the six months ended June 30, 2014 compared to the same period in 2013 from improvement in Automation and Analytics. Income from operations increased by $9.0 million primarily on the performance of Automation and Analytics.

Critical Accounting Policies and Estimates

Management's discussion and analysis of our financial condition and results of operations are based on our 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 that the following critical accounting

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policies are affected by significant judgments and estimates used in the preparation of our condensed consolidated financial statements:

•Revenue recognition;

•Valuation and impairment of goodwill, intangible assets and other long lived assets;

•Excess and obsolete inventory reserve;

•Valuation of share-based awards; and

•Accounting for income taxes.

During the six months ended June 30, 2014, there were no significant changes in our critical accounting policies and estimates.

Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2013 for a discussion of our critical accounting policies and estimates.

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Recently Adopted and Issued Accounting Standards

Please refer to Part I, Note 1, Organization and Summary of Significant Accounting Policies, of this Quarterly Report on Form 10-Q for a description of recently adopted and issued accounting standards.

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Revenues, Cost of Revenues and Gross Profit

Automation and Analytics Segment

The tables below show our Automation and Analytics segment's results for the periods shown, and the change between those periods (in thousands, except percentages):

Three Months Ended June 30,

Change in