Edgar Filing: OMNICELL, Inc

10-Q

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, 2015
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File No. 000-33043

OMNICELL, INC.

(Exact name of registrant as specified in its charter)



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

590 East Middlefield Road

Mountain View, CA 94043

(Address of registrant's principal executive offices, including zip code)

(650) 251-6100

(Registrant's telephone number, including area code)

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

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

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



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

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

As of October 29, 2015, there were 35,427,994 shares of the registrant's common stock, $0.001 par value, outstanding.

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OMNICELL, INC.

Form 10-Q

Quarterly Period Ended September 30, 2015

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		Page
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014	4
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and September 30, 2014	5
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and September 30, 2014	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and September 30, 2014	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
Item 4.	Controls and Procedures	41
PART II	OTHER INFORMATION	42
Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3.	Defaults Upon Senior Securities	56
Item 4.	Mine Safety Disclosures	56
Item 5.	Other Information	56
Item 6.	Exhibits	56

Signatures		57
Index to Exhibits		58

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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OMNICELL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



	September 30, 2015			December 31, 2014
	(In thousands, except par value)
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	57,757		$	125,888
Accounts receivable, net of allowances of $1,733 and $1,279, respectively	115,680			82,763
Inventories	49,460			31,554
Prepaid expenses	17,698			23,518
Deferred tax assets	12,489			12,446
Other current assets	6,802			7,215
Total current assets	259,886			283,384
Property and equipment, net	34,026			36,178
Long-term net investment in sales-type leases	13,557			10,848
Goodwill	148,727			122,720
Intangible assets, net	92,042			82,667
Long-term deferred tax assets	1,513			1,144
Other long-term assets	26,971			23,273
Total assets	$	576,722		$	560,214

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	24,691		$	19,432
Accrued compensation	15,224			19,874
Accrued liabilities	29,382			19,299
Deferred service revenue	26,168			25,167
Deferred gross profit	27,179			28,558
Total current liabilities	122,644			112,330
Deferred service revenue, long-term	18,436			20,308
Long-term deferred tax liabilities	32,320			30,454
Other long-term liabilities	11,782			7,024
Total liabilities	185,182			170,116
Commitments and contingencies (Notes 9 & 10)
Stockholders’ equity:
Common stock, $0.001 par value, 100,000 shares authorized; 44,548 and 43,540 shares issued; 35,403 and 35,816 shares outstanding, respectively	45			43
Treasury stock, at cost, 9,145 and 7,721 shares outstanding	(185,074		)	(135,053		)
Additional paid-in capital	485,919			457,436
Retained earnings	92,138			69,033
Accumulated other comprehensive income (loss)	(1,488		)	(1,361		)
Total stockholders’ equity	391,540			390,098
Total liabilities and stockholders’ equity	$	576,722		$	560,214

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(Unaudited) (In thousands, except per share data)
	(Unaudited) (In thousands, except per share data)
Revenues:
Product	$	100,941		$	92,229		$	284,204		$	260,053
Services and other revenues	24,293			20,314			70,039			59,306
Total revenues	125,234			112,543			354,243			319,359
Cost of revenues:
Cost of product revenues	51,700			44,510			143,319			124,413
Cost of services and other revenues	9,831			8,487			28,074			24,865
Total cost of revenues	61,531			52,997			171,393			149,278
Gross profit	63,703			59,546			182,850			170,081
Operating expenses:
Research and development	9,176			7,078			25,941			19,670
Selling, general and administrative	40,668			38,871			123,690			114,302
Gain on business combination	—			—			(3,443		)	—
Total operating expenses	49,844			45,949			146,188			133,972
Income from operations	13,859			13,597			36,662			36,109
Other income (expense), net	(646		)	(706		)	(1,635		)	(1,003		)
Income before provision for income taxes	13,213			12,891			35,027			35,106
Provision for income taxes	5,177			5,591			11,922			13,824
Net income	$	8,036		$	7,300		$	23,105		$	21,282
Net income per share:
Basic	$	0.22		$	0.20		$	0.64		$	0.60
Diluted	$	0.22		$	0.20		$	0.63		$	0.58
Weighted-average shares outstanding:
Basic	35,806			35,994			35,983			35,634
Diluted	36,613			36,832			36,870			36,617

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME



	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(Unaudited) (In thousands)
	(Unaudited) (In thousands)
Net income	$	8,036		$	7,300		$	23,105		21,282
Other comprehensive loss, net of reclassification adjustments:
Foreign currency translation adjustments	(1,555		)	(669		)	(127		)	(550		)
Other comprehensive loss	(1,555		)	(669		)	(127		)	(550		)
Comprehensive income	$	6,481		$	6,631		$	22,978		$	20,732

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	Nine months ended September 30,
	2015			2014
	(In thousands)
Operating Activities
Net income	$	23,105		$	21,282
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	18,457			14,705
Loss on disposal of fixed assets	114			221
Gain on business combination	(3,443		)	—
Provision for receivable allowance	542			850
Share-based compensation expense	11,267			8,610
Income tax benefits from employee stock plans	3,838			4,065
Excess tax benefits from employee stock plans	(3,942		)	(4,456		)
Provision for excess and obsolete inventories	317			450
Deferred income taxes	(2,235		)	1,307
Changes in operating assets and liabilities:
Accounts receivable, net	(26,132		)	(35,028		)
Inventories	(13,215		)	1,301
Prepaid expenses	5,937			1,015
Other current assets	1,019			1,412
Net investment in sales-type leases	(3,220		)	677
Other long-term assets	247			360
Accounts payable	(127		)	5,420
Accrued compensation	(5,003		)	(6,533		)
Accrued liabilities	4,608			(416		)
Deferred service revenue	(4,199		)	2,650
Deferred gross profit	(1,170		)	15,585
Other long-term liabilities	(833		)	838
Net cash provided by operating activities	5,932			34,315
Investing Activities
Acquisition of intangible assets, intellectual property and patents	(331		)	(236		)
Software development for external use	(9,445		)	(7,925		)
Purchases of property and equipment	(6,081		)	(10,151		)
Business acquisitions, net of cash acquired	(25,455		)	(19,749		)
Net cash used in investing activities	(41,312		)	(38,061		)
Financing Activities
Proceeds from issuances under stock-based compensation plans	15,665			18,157
Employees' taxes paid related to restricted stock units	(2,285		)	(2,023		)
Common stock repurchases	(50,021		)	(17,052		)
Excess tax benefits from employee stock plans	3,942			4,456
Net cash (used) provided by financing activities	(32,699		)	3,538
Effect of exchange rate changes on cash and cash equivalents	(52		)	(136		)
Net decrease in cash and cash equivalents	(68,131		)	(344		)
Cash and cash equivalents at beginning of period	125,888			104,531
Cash and cash equivalents at end of period	$	57,757		$	104,187

Supplemental cash flow information
Cash paid for interest	$	94		$	—

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Cash paid for taxes, net of refunds	$	7,027	$	—
Supplemental disclosing of non-cash investing activities
Unpaid property and equipment purchases	$	554	$	444
Non-cash activity business acquisition	$	7,386	$	860
Treasury stock in accrued liabilities	$	—	$	2,586

The accompanying notes are an integral part of these unaudited 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

Business

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

Basis of presentation

The accompanying unaudited Condensed Consolidated Financial Statements reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of the Company as of September 30, 2015 and December 31, 2014, the results of their operations, comprehensive income and cash flows for the three and nine months ended September 30, 2015 and September 30, 2014. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in our annual report on Form 10-K for the year ended December 31, 2014 filed with the SEC on March 30, 2015. Our results of operations, comprehensive income and cash flows for the three and nine months ended September 30, 2015 are not necessarily indicative of results that may be expected for the year ending December 31, 2015, or for any future period.

Principles of consolidation

The Condensed Consolidated Financial Statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.

On April 21, 2015, we completed the acquisition of Mach4 Automatisierungstechnik GmbH (“Mach4”), a privately held German limited liability company with registered office in Bochum, Germany. On April 30, 2015, we acquired the remaining 85% of the issued and outstanding ordinary shares of Avantec Healthcare Limited (“Avantec”) not already held by Omnicell. The consolidated financial statements include the results of operations of Mach4 and Avantec commencing as of their respective acquisition dates.

Use of estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in our Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management's best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. Our critical accounting policies are those that affect our financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition, share-based compensation, inventory valuation, accounts receivable and notes receivable (net investment in sales-type leases), valuation of goodwill, purchased intangibles and long-lived assets, and accounting for income taxes.

Segment reporting change

As previously disclosed, since the first quarter of 2015, we modified the segment presentation to reflect the changes in how our Chief Operating Decision Maker (“CODM”) reviews the segments and the overall business. See Note 14, Segment Information, for additional information on our segment reporting change.

Our CODM is our Chief Executive Officer. With the increase in completed acquisitions in the last two years, our CODM changed how the financial information was reviewed to exclude general corporate-level costs that are not specific to either of the reporting segments when evaluating the operating results of each segment. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses.

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The historical information presented has been retrospectively adjusted to reflect the modified segment reporting. Our CODM allocates resources and evaluates the performance of our segments using information about its revenues, gross profit and income from operations, excluding certain costs which are managed separately at the corporate level. We enhanced our segment reporting structure to match our operating structure based on how our CODM views the business and allocates resources, beginning in the first quarter of 2015.

Concentration of credit risk

Financial instruments that may potentially subject us to concentrations of credit risk consist principally of cash equivalents and accounts receivable. Cash equivalents are maintained with several financial institutions and may exceed the amount of insurance provided on such balances. The majority of our accounts receivable are derived from sales to customers for commercial applications. We perform ongoing credit evaluations of our customers’ financial condition and limit the amount of credit extended when deemed necessary but generally require no collateral. We maintain reserves for potential credit losses. Our products are broadly distributed and there were no customers that accounted for more than 10% of our accounts receivable as of September 30, 2015 and December 31, 2014. We believe that we have no significant concentrations of credit risk as of September 30, 2015.

Significant accounting policies

There have been no material changes in our significant accounting policies for the three and nine months ended September 30, 2015, as compared to the significant accounting policies described in our annual report on Form 10-K for the year ended December 31, 2014.

Recently issued authoritative guidance

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. Under the new guidance, an entity is required to recognize an amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The original effective date for the ASU would have required the Company to adopt the standard beginning in its first quarter of fiscal year 2017. In July 2015, the FASB voted to amend ASU No. 2014-09 by approving a one-year deferral of the effective date as well as providing the option to early adopt the standard on the original effective date. Accordingly, we may adopt the standard in its first quarter of fiscal year 2018. The new revenue guidance may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of adoption. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial position or results of operations.

In July 2015, the FASB issued ASU No. 2015-11, Simplifying the Measurement of Inventory. The new guidance 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 new guidance will be effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years and should be applied prospectively. Early adoption is permitted as of the beginning of an interim or annual reporting period. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial position or results of operations.

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. Acquirers are 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. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial position or results of operations.

There was no other recently issued authoritative guidance that has a material impact on our Condensed Consolidated Financial Statements through the reporting date.

Note 2. Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted-average number of shares outstanding during the period. 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

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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 income 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,
	2015		2014		2015		2014
	(In thousands, except per share data)
Net income	$	8,036	$	7,300	$	23,105	$	21,282
Weighted-average shares outstanding — basic	35,806		35,994		35,983		35,634
Dilutive effect of employee stock plans	807		838		887		983
Weighted-average shares outstanding — diluted	36,613		36,832		36,870		36,617
Net income per share — basic	$	0.22	$	0.20	$	0.64	$	0.60
Net income per share — diluted	$	0.22	$	0.20	$	0.63	$	0.58
Anti-dilutive weighted-average shares related to stock award plans	478		427		380		364

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

Cash and cash equivalents as of September 30, 2015 and December 31, 2014 includes 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, 2015 and December 31, 2014 were as follows:



	September 30, 2015		December 31, 2014
	(In thousands)
Cash	$	17,649	$	61,311
Money market fund	40,108		64,577
Total cash and cash equivalents	$	57,757	$	125,888

Fair value hierarchy

The Company measures its financial instruments at fair value. The Company’s cash equivalents are classified within Level 1 of the fair value hierarchy as they are valued primarily using quoted market prices utilizing market observable inputs. The Company's foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments. The Level 3 valuation inputs include the Company’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. The inputs are unobservable in the market and significant to the instrument’s valuation.

The following table represents the fair value hierarchy of the Company’s financial assets measured at fair value as of September 30, 2015:



	Level 1		Level 2		Level 3		Total
	(In thousands)
Money market funds	$	40,108	$	—	$	—	$	40,108
Derivative contracts	—		17		—		17
Total financial assets	$	40,108	$	17	$	—	$	40,125
Contingent consideration liability	—		—		5,572		5,572
Total financial Liabilities	$	—	$	—	$	5,572	$	5,572

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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. We did not hold any Level 3 assets or liabilities as of December 31, 2014.

There have been no transfers between fair value measurement levels during the three and nine months ended September 30, 2015 and September 30, 2014.

The following table represents the fair value hierarchy of the Company’s financial asset measured at fair value as of December 31, 2014:



	Level 1		Level 2		Total
	(In thousands)
Money market fund	$	64,577	$	—	$	64,577
Total financial assets	$	64,577	$	—	$	64,577

The Company had no financial liabilities measured at fair value at December 31, 2014.

Net investment in sales-type leases. The carrying amount of our sales-type lease receivables is a reasonable estimate of fair value as the unearned interest income is immaterial.

Foreign Currency Risk Management

We operate in foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations between the U.S. dollar and various foreign currencies, the most significant of which is the British Pound and Euro. In order to manage foreign currency risk, we enter into foreign exchange forward contracts to mitigate risks associated with changes in spot exchange rates of mainly non-functional currency denominated assets or liabilities of our foreign subsidiaries. In general, the market risk related to these contracts is offset by corresponding gains and losses on the hedged transactions. By working only with major banks and closely monitoring current market conditions, we seek to limit the risk that counterparties to these contracts may be unable to perform. The foreign exchange forward contracts are measured at fair value and reported as other current assets or accrued liabilities on the Condensed Consolidated Balance Sheets. The derivative instruments we use to hedge this exposure are not designated as hedges. Any gains or losses on the foreign exchange forward contracts are recognized in earnings as Other Income/Expense in the period incurred in the Condensed Consolidated Statements of Operations. We do not enter into derivative contracts for trading purposes.

The aggregate notional amounts of our outstanding foreign exchange contracts as of September 30, 2015 were $1.8 million. The aggregate fair value of these outstanding foreign exchange contracts as of September 30, 2015 were less than $0.1 million. We did not have any outstanding foreign exchange contracts as of December 31, 2014.

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Note 4. Balance Sheet Components



	September 30, 2015			December 31, 2014
	(In thousands)
Inventories:
Raw materials	$	11,027		$	8,254
Work in process	2,238			64
Finished goods	36,195			23,236
Total inventories	$	49,460		$	31,554

Property and equipment:
Equipment	$	44,448		$	42,829
Furniture and fixtures	5,903			5,689
Leasehold improvements	9,064			8,701
Purchased software	29,770			28,920
Construction in progress	4,902			1,538
Property and equipment, gross	94,087			87,677
Accumulated depreciation and amortization	(60,061		)	(51,499		)
Total property and equipment, net	$	34,026		$	36,178

Other long term assets:
Capitalized software, net	$	24,838		$	19,643
Other assets	2,133			3,630
Total other long term assets, net	$	26,971		$	23,273

Accrued liabilities:
Rebates and lease buyouts	$	4,603		$	6,512
Advance payments from customers	7,567			4,834
Group purchasing organization fees	3,437			3,475
Taxes payable	3,574			2,181
Other accrued liabilities	10,201			2,297
Total accrued liabilities	$	29,382		$	19,299

Note 5. Net Investment in Sales-Type Leases

On 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 type of transactions are collateralized by the underlying equipment leased and consist of the following components at September 30, 2015 and December 31, 2014:

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	September 30, 2015			December 31, 2014
	(In thousands)
Net minimum lease payments to be received	$	20,731		$	17,616
Less: unearned interest income portion	(1,000		)	(1,131		)
Net investment in sales-type leases	19,731			16,485
Less: short-term portion*	(6,174		)	(5,637		)
Long-term net investment in sales-type leases	$	13,557		$	10,848

* The short-term portion of the net investments in sales-type leases are included in the Other current assets on the Condensed Consolidated Balance Sheets.

We evaluate our sales-type leases individually and collectively for impairment, and recorded $0.1 million collective allowance for credit losses as of September 30, 2015 and $0.2 million as of December 31, 2014.

At September 30, 2015, the future minimum lease payments under sales-type leases are as follows:



	September 30, 2015
Year ended December 31,	(In thousands)
Remaining three months of 2015	$	1,774
2016	6,454
2017	5,428
2018	3,808
2019	2,188
Thereafter	1,079
Total	$	20,731

Note 6. Business Acquisitions

Mach4 Acquisition

On April 21, 2015, we completed the acquisition of Mach4, a privately held German limited liability company with its registered office in Bochum, Germany pursuant to a share purchase agreement (the “Mach4 Agreement”), under which Omnicell International, Inc., a wholly-owned subsidiary of Omnicell Inc., purchased the entire issued share capital of Mach4 (the “Mach4 Acquisition”).

Mach4 manufactures robotic dispensing systems used by retail and hospital pharmacies and the Mach4 acquisition provides Omnicell with a more robust product offering that is intended to be leveraged to create opportunities to sell additional Omnicell medication cabinets. The robotic storage and dispensing product offering provides Omnicell with a solution to better compete for international market share.

Pursuant to the terms of the Mach4 Agreement, we paid approximately $17.2 million in cash after adjustments provided for in the Mach4 Agreement, of which $2.7 million was placed in an escrow fund, which will be distributed to Mach4's former stockholders subject to claims that we may make against the escrow fund with respect to indemnification and other claims within 18 months after the closing date of this transaction.

Avantec Acquisition

On April 30, 2015, we completed the acquisition of Avantec, the privately-held distributor of Omnicell’s products in the United Kingdom, pursuant to a share purchase agreement (the “Avantec Agreement”). Pursuant to the Avantec Agreement, we acquired the remaining 85% of issued and outstanding ordinary shares of Avantec that was not previously owned by the Company. Avantec develops medication and supply automation products that complement our solutions for configurations suited to the United Kingdom marketplace, and had been the exclusive distributor of our medication and supply automation solutions since 2005 in the United Kingdom.

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Pursuant to the terms of the Avantec Agreement, we agreed to pay $12.0 million in cash (the “Purchase Consideration”) and potential earn-out payments of up to $3.0 million payable after December 31, 2015 and an additional $3.0 million payable after December 31, 2016, based on future bookings. The fair value of these potential earn-out payments as of the acquisition date was $5.6 million. Pursuant to the terms of the Avantec Agreement we retained $1.8 million of the Purchase Consideration to be held to settle any future indemnification claims within 18 months period that we may make following the closing.

The fair value of the contingent consideration liability related to Avantec is revalued at each reporting date or more frequently if circumstances dictate. Changes in the fair value of this obligation are recorded as income or expense within other expense in our condensed consolidated statements of operation. The significant unobservable inputs used in the fair value measurement of the contingent consideration are the achievement of booking targets and the discount rate. Significant increases or decreases in any of those inputs in isolation would result in a significantly lower or higher fair value measurement.

Prior to the Avantec Acquisition, we accounted for our 15% ownership interest in Avantec as an equity-method investment. The Avantec acquisition -date carrying book value of our previous equity interest was $1.3 million. This transaction was accounted for as a step acquisition, which required us to re-measure our previously held 15% ownership interest to fair value and record the difference between the fair value and carrying value as a gain. The fair value of the equity investment was determined to be $4.7 million which resulted in a gain of $3.4 million that was recorded in operating income in our Condensed Consolidated Statement of Operations in the three months ended June 30, 2015.

Both of the above acquired companies are included in our Automation and Analytics segment.

We accounted for the transactions above under the provisions of FASB Accounting Standards Codification ("ASC") Topic 805, Business Combinations. Accordingly, the estimated fair value of the consideration transferred to purchase the acquired companies is allocated to the assets acquired and the liabilities assumed based on their respective fair values. We have made significant estimates and assumptions in determining the allocation of the acquisition consideration.

The purchase price allocations are subject to certain post-closing working capital adjustments for the acquired current assets and current liabilities of both acquisitions at their respective acquisition dates. The total consideration and the allocation of consideration to the individual net assets is preliminary, as there are remaining uncertainties to be resolved, including the settlement of the final net working capital adjustment for each.

Our preliminary allocation of the total purchase price for each transaction is summarized below:



	Mach4		Avantec		Total
	(In thousands)
Cash	$	397	$	3,392	$	3,789
Accounts receivable	3,743		3,607		7,350
Inventory	3,580		1,428		5,008
Deferred tax assets and other current assets	368		89		457
Total current assets	8,088		8,516		16,604
Property and equipment	463		—		463
Intangibles	7,710		6,341		14,051
Goodwill	10,539		15,606		26,145
Other non-current assets	52		—		52
Total assets	26,852		30,463		57,315
Current liabilities	3,684		4,125		7,809
Non-current deferred tax liabilities	2,564		1,269		3,833
Deferred service revenue and gross profit	2,314		928		3,242
Other non-current liabilities	1,056		—		1,056
Total purchase price	$	17,234	$	24,141	$	41,375
Total purchase price, net of cash received	$	16,837	$	20,749	$	37,586

Identifiable intangible assets

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Intangible assets acquired and their respective estimated remaining useful lives over which each asset will be amortized are as follows:



	Mach4			Avantec
	Fair value		Weighted average useful life	Fair value		Weighted average useful life
	(In thousands)		(In years)	(In thousands)		(In years)
Developed technology	$	3,290	8	$	—	—
Trade name	850		6	92		2
Customer relationships	3,570		11-12	5,834		12
Backlog	—		—	415		2
Total purchased intangible assets	$	7,710		$	6,341

Developed technology represents completed technology that has reached the technological feasibility and/or is currently offered for sale to Mach4 customers. The fair value is determined based on the relief from royalty method under the income approach, which requires us to estimate a reasonable royalty rate, identify relevant projected revenues and expenses, and select an appropriate discount rate. A royalty rate of 5.0% was used to value the developed technology. The after-tax cash flows were discounted to present value utilizing a 17.5% discount rate, which is based on our company-wide required return for this acquisition plus a discount of 1.5% to account for the unique riskiness of the asset. The developed technology had a fair value of $3.3 million and had an estimated economic life of eight years based on estimated technological obsolescence and is being amortized on an accelerated basis.

Trade name represents the fair value brand recognition that was determined using the relief-from-royalty method under the income approach. A royalty rate of 1.0% and 2.0% was used to value the trade names of Avantec and Mach4, respectively. The value of trade names of $0.1 million for Avantec is being amortized on straight-line method and $0.9 million for Mach4 is being amortized on an accelerated basis.

Customer relationships represent the fair value of future projected revenues that will be derived from the sale of products to existing customers of the acquired company. The fair value of the customer relationships is determined based on the excess earnings method under the income approach that resulted in a value of $3.6 million for Mach4 and $5.8 million for Avantec and has been amortized over their useful lives on accelerated basis.

Backlog represents the fair value of sales order backlog as of the valuation date and its fair value is determined based on the excess earnings method under the income approach and is being amortized on straight-line method.

Goodwill

The goodwill arising from these acquisitions is primarily attributed to sales of future products and services and the assembled workforce. Goodwill is not deductible for tax purposes. Goodwill is not being amortized but is reviewed annually for impairment or more frequently if impairment indicators arise, in accordance with authoritative guidance.

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

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data):



	Nine months ended September 30,
	2015		2014
	(In thousands, except per share data)
Pro forma net revenues	$	361,217	$	340,915
Pro forma net income	$	23,742	$	22,511
Pro forma net income per share basic	$	0.66	$	0.63
Pro forma net income per share diluted	$	0.64	$	0.61

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, 2014	$	28,543	$	94,177		$	122,720
Goodwill acquired - Mach4	10,539		—			10,539
Goodwill acquired - Avantec	15,606		—			15,606
Foreign currency exchange rate fluctuations	194		(332		)	(138		)
Net balance as of September 30, 2015	$	54,882	$	93,845		$	148,727

Intangible assets, net

The carrying amounts of intangibles as of September 30, 2015 are as follows:



	September 30, 2015
	Gross carrying amount		Accumulated amortization			Foreign currency exchange rate fluctuations			Net carrying amount		Useful life (years)
	(In thousands, except for years)
Customer relationships	$	69,520	$	(10,317	)	$	(355	)	$	58,848	5 - 30
Acquired technology	30,991		(5,534		)	14			25,471		3 - 20
Trade names	8,069		(2,289		)	(6		)	5,774		1 - 12
Patents	1,986		(342		)	—			1,644		2 - 20
Backlog	424		(105		)	(14		)	305		1.7
Total intangibles assets, net	$	110,990	$	(18,587	)	$	(361	)	$	92,042

The carrying amounts of intangibles as of December 31, 2014 were as follows:

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	December 31, 2014
	Gross carrying amount		Accumulated amortization			Foreign currency exchange rate fluctuations			Net carrying amount		Useful life (years)

Customer relationships	$	60,150	$	(7,596	)	$	(323	)	$	52,231	5 - 30
Acquired technology	27,580		(4,068		)	—			23,512		3 - 20
Trade names	7,110		(1,559		)	(17		)	5,534		3 - 12
Patents	1,655		(265		)	—			1,390		2 - 20
Total intangibles assets, net	$	96,495	$	(13,488	)	$	(340	)	$	82,667

Amortization expense of intangible assets was $2.0 million and $1.2 million for the three months ended September 30, 2015 and September 30, 2014, respectively, and $5.1 million and $3.3 million for the nine months ended September 30, 2015 and September 30, 2014, respectively.

The estimated future amortization expenses for intangible assets are as follows:



	September 30, 2015
Year ended December 31,	(In thousands)
Remaining three months of 2015	$	1,919
2016	6,849
2017	6,034
2018	5,546
2019	5,262
Thereafter	66,432
Total	$	92,042

Note 8. Deferred Gross Profit

Deferred gross profit consists of the following:



	September 30, 2015			December 31, 2014
	(In thousands)
Sales of medication and supply dispensing systems including packaging equipment ⁽¹⁾	$	44,158		$	36,947
Less: cost of revenues, excluding installation costs	(16,979		)	(8,389		)
Total deferred gross profit	$	27,179		$	28,558

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⁽¹⁾	Delivered and invoiced, pending installation.

Note 9. Commitments

Lease commitments

We lease office space and office equipment under operating leases. At September 30, 2015, future minimum lease payments under such operating leases were as follows:

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	September 30, 2015
	(In thousands)
Remaining three months of 2015	$	1,751
2016	6,526
2017	5,885
2018	5,490
2019	5,481
Thereafter	15,216
Total minimum future lease payments	$	40,349

Purchase obligations

During the course of the business, we issue purchase orders based on our current manufacturing needs. At September 30, 2015, we had non-cancelable purchase commitments of $28.8 million, which are expected to be paid within the next twelve months.

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Note 10. Contingencies

Legal Proceedings

We are currently involved in various legal proceedings. As required under ASC 450, Contingencies, we accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. We have not recorded any accrual for contingent liabilities associated with the legal proceedings described below based on our belief that any potential loss, while reasonably possible, is not probable. Further, any possible range of loss in these matters cannot be reasonably estimated at this time. We believe that we have valid defenses with respect to legal proceedings pending against us. However, litigation is inherently unpredictable, and it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of this contingency or because of the diversion of management's attention and the creation of significant expenses.

Pending legal proceedings as of September 30, 2015 are as follows:

On September 12, 2014, MV Circuit Design, Inc., an Ohio company ("MV Circuit"), brought an action to correct the inventorship of certain patents owned by Omnicell, as well as related state-law claims against Omnicell in the Northern District of Ohio (Case No. 1:14-cv-02028-DAP) regarding allegations of fraud in the filing and prosecution of U.S. Patent Nos. 8,180,485, 8,773,270, 8,812,153, PCT/US2007/003765, PCT/US2011/063597, and PCT/US2011/0635505 (the “Action”). On November 14, 2014, we filed a Motion to Dismiss the Action. MV Circuit responded on January 29, 2015, and we replied in support of our Motion to Dismiss on February 17, 2015. On March 24, 2015, the Court issued an Order granting in part and denying in part the Motion to Dismiss. Specifically, the Court granted Omnicell's Motion to Dismiss with respect to Counts 4, 5, and 6 (declaratory judgments regarding PCT/US2007/003765, PCT/US2011/063597, and PCT/US2011/0635505) and count 13 (civil conspiracy). The Court denied the Company's Motion to Dismiss with respect to Count 9 (fraud), Count 7 (fraudulent concealment) and Count 8 (negligent misrepresentation). Omnicell filed an Answer to the Complaint on April 8, 2015. Following an initial Case Management Conference on April 22, 2015, the Court ordered MV Circuit and Omnicell to make a limited initial production of documents. The parties completed this initial document production and held further conference calls with the Court on September 16 and October 19, 2015 to discuss a potential settlement. The parties are continuing settlement negotiations and a follow-up teleconference with the Court is scheduled for November 18, 2015. No case schedule has been set.

Note 11. Income Taxes

We provide for income taxes for each interim period based on the estimated annual effective tax rate for the year, adjusting for discrete items in the quarter in which they arise. The annual effective tax rate before discrete items was 39.3% and 40.5% for the nine months ended September 30, 2015 and September 30, 2014, respectively. The nine months ended September 30, 2015 and 2014 annual effective tax rate differed from the statutory rate of 35.0% primarily due to the unfavorable impact of state income taxes, non-deductible equity charges, and other non-deductible expenditures, which were partially offset by the domestic production activities deduction.

We recorded a gain of $3.4 million attributable to the increase in the fair value of Omnicell's 15% minority interest in Avantec which was revalued in conjunction with our purchase of the remaining 85% of Avantec shares. This gain was treated as a discrete item and excluded from profit-before-tax in calculating the annual effective tax rate for the nine months ended September 30, 2015.

The federal research and development credit law, which was extended through December 31, 2014, retroactively has not been extended to the end of 2015. As a result the annual effect tax rate for the nine months ended September 30, 2015 and 2014 did not consider the effect of the federal research and development tax credit.

As of September 30, 2015 and December 31, 2014, the Company had gross unrecognized tax benefits of $7.1 million and $5.9 million, respectively. It is the Company’s policy to classify accrued interest and penalties as part of the unrecognized tax benefits, but to record interest and penalties in operating expense. As of September 30, 2015 and December 31, 2014, the amount of accrued interest and penalties was immaterial.

As of September 30, 2015, the calendar years 2011 and thereafter are open and are 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, our federal and California tax years remain open from 1996 and 1992, respectively. We have been contacted for audit by the Internal Revenue Service for tax years 2011, 2012 and 2013.

Although we believe we have 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.

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Note 12. Stock Repurchases

In August 2012, our Board of Directors authorized a program (the "2012 Stock Repurchase Program") to repurchase up to $50.0 million of common stock, of which approximately $45.1 million had been repurchased as of December 31, 2014, and the remaining $4.9 million has been repurchased as of the second quarter of 2015 and the 2012 Stock Repurchase Program was concluded. In November 2014, our Board of Directors authorized a program (the "2014 Stock Repurchase Program") to repurchase up to $50.0 million of common stock of which approximately $45.1 million had been repurchased as of September 30, 2015. The 2014 Stock Repurchase Program has a total of $4.9 million remaining for future repurchases as of September 30, 2015, and the program has no expiration date.

During the nine months ended September 30, 2015, we repurchased approximately 1,424 thousand shares under our stock repurchase programs.

The following table summarizes our stock repurchases:



	September 30, 2015		December 31, 2014
	(In thousands, except per share data)
Total number of shares repurchased	1,424		884
Dollar amount of shares repurchased	$	50,020	$	24,091
Average price paid per share	$	35.13	$	27.24

Note 13. Employee Benefits and Share-Based Compensation

Stock based plans

For a detailed explanation of our stock plans and subsequent changes please refer to Note 16, Employee Benefits and Stock-Based Compensation, of our Annual Report on Form 10-K for the year ended December 31, 2014, filed with the SEC on March 30, 2015.

Share-based compensation expense

The following table sets forth the total share-based compensation expense recognized in our Condensed Consolidated Statements of Operations:



	Three months ended				Nine months ended
	September 30, 2015		September 30, 2014		September 30, 2015		September 30, 2014
	(In thousands)
Cost of product and service revenues	$	581	$	441	$	1,630	$	973
Research and development	587		407		1,472		1,156
Selling, general and administrative	2,798		2,313		8,165		6,481
Total share-based compensation expense	$	3,966	$	3,161	$	11,267	$	8,610

The following weighted average assumptions are used to value share options and Employee Stock Purchase Plan ("ESPP") shares issued pursuant to our equity incentive plans for the three and nine months ended September 30, 2015 and September 30, 2014:

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	Three months ended				Nine months ended
	September 30, 2015		September 30, 2014		September 30, 2015		September 30, 2014
	(In thousands, except percentages)
Stock Option Plans
Expected life, years	5.04		4.81		5.04		4.80
Expected volatility, %	29.3	%	34.1	%	31.1	%	35.1	%
Risk free interest rate, %	1.73	%	1.70	%	1.63	%	1.56	%
Estimated forfeiture rate %	2.5	%	2.5	%	2.5	%	2.5	%
Dividend yield, %	—	%	—	%	—	%	—	%



	Three months ended				Nine months ended
	September 30, 2015		September 30, 2014		September 30, 2015		September 30, 2014
	(In thousands, except percentages)
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, %	25.79-34.36%		29.56-39.69%		25.79-37.53%		29.56-42.16%
Risk free interest rate, %	0.12-0.79%		0.03-0.53%		0.03-0.79%		0.03-0.53%
Estimated forfeiture rate %	—	%	—	%	—	%	—	%
Dividend yield, %	—	%	—	%	—	%	—	%

Stock option and restricted stock activity

Stock options activity

The following table summarizes the stock option activity under the Company’s equity incentive plans during the nine months ended September 30, 2015:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Years	Aggregate Intrinsic Value⁽¹⁾
	(In thousands, except per share data)
Stock Options
Outstanding at December 31, 2014	2,672		$	19.02	6.5
Granted	322		34.90
Exercised	(494	)	15.90
Expired	(2	)	15.72
Forfeited	(81	)	23.82
Outstanding at September 30, 2015	2,417		$	21.61	6.5	$	24,341
Exercisable at September 30, 2015	1,368		$	16.73	4.8	$	19,660
Vested and expected to vest at September 30, 2015 and thereafter	2,390		$	21.50	6.4	$	24,293

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⁽¹⁾	Intrinsic value is calculated as the difference between the market value or closing price of our common stock as of the last trading day of the period as reported by the NASDAQ Global Select Market, and the exercise price of the option.

The weighted-average fair value per share of options granted during the three and nine months ended September 30, 2015, was $10.51 and $10.57, respectively, and the weighted-average fair value per share of options granted during the three and nine months ended September 30, 2014 was $8.51 and $8.78, 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. The intrinsic value of options exercised during the three and nine months ended September 30, 2014 was $2.5 million and $10.4 million, respectively.

As of September 30, 2015, total unrecognized compensation cost related to unvested stock options was $9.0 million, which is expected to be recognized over a weighted-average vesting period of 2.7 years.

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Restricted stock activity

Restricted stock activity under the Company’s equity incentive plans in the nine months ended September 30, 2015 is as follows:



	Number of Shares		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Years	Aggregate Intrinsic Value
	(In thousands, except per share data)
Restricted Stock Units (RSUs)
Outstanding at December 31, 2014	399		$	24.00	1.5
Granted	131		34.72
Vested	(99	)	21.51
Forfeited	(29	)	23.79
Outstanding and unvested at September 30, 2015	402		$	28.10	1.3	$	12,503
Expected to vest after September 30, 2015	392				1.2	$	12,181

The weighted-average grant date fair value per share of RSUs granted during the nine months ended September 30, 2015 and September 30, 2014 was $34.72 and and $25.16, respectively.

As of September 30, 2015, total unrecognized compensation expense related to RSUs was $9.3 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.4 years.



	Number of Shares		Weighted-Average Grant Date Fair Value
	(In thousands, except per share data)
Restricted Stock Awards (RSAs)
Outstanding at December 31, 2014	36		$	26.47
Granted	37		36.05
Vested	(41	)	26.47
Forfeited	(1	)	27.65
Outstanding and unvested at September 30, 2015	31		$	35.95

The weighted-average grant date fair value per share of RSAs granted during the nine months ended September 30, 2015 was and $36.05.

As of September 30, 2015, total unrecognized compensation cost related to RSAs was $0.7 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.7 years.

Performance-based restricted stock unit activity

Performance-based restricted stock activity under our equity incentive plans in the nine months ended September 30, 2015 is as follows:



	Number of Shares		Weighted-Average Grant Date Fair Value Per Unit
	(In thousands, except per share data)
Performance-based Restricted Stock Units (PSUs)
Outstanding at December 31, 2014	233		$	17.96
Granted	60		29.56
Vested	(70	)	18.91
Forfeited	(27	)	14.69
Outstanding and unvested at September 30, 2015	196		$	21.63

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The weighted-average grant date fair value per share of PSUs granted during the nine months ended September 30, 2015 and September 30, 2014 was $29.56 and $14.36, respectively. The total fair value of PSUs that vested during the nine months ended September 30, 2015 and September 30, 2014 was $2.6 million and $2.1 million, respectively.

As of September 30, 2015, total unrecognized compensation cost related to PSUs was approximately $2.0 million, which is expected to be recognized over the remaining weighted-average period of 1.1 years.

Employee Stock Purchase Plan (ESPP) activity

The unrecognized compensation cost related to the shares to be purchased under our ESPP was approximately $2.1 million as of September 30, 2015, and is expected to be recognized over a weighted-average period of 0.1 years.

Summary of shares reserved for future issuance under equity incentive plans

We had the following ordinary shares reserved for future issuance under our equity incentive plans as of June 30, 2015:



	Number of Shares
	(In thousands)
Share options outstanding	2,417
Restricted share awards outstanding	629
Shares authorized for future issuance	4,402
ESPP shares available for future issuance	3,251
Total shares reserved for future issuance as of September 30, 2015	10,699

Note 14. Segment Information

In the first quarter of 2015, we modified the segment presentation to reflect the changes in how our Chief Operating Decision Maker (“CODM”) reviews the segments and the overall business. With the increase in completed acquisitions in the last two years, we changed how the financial information was presented for CODM review to exclude general corporate-level costs that are not specific to either of the reporting segments when evaluating the operating results of each segment. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses.

The historical information presented has been retrospectively adjusted to reflect the modified segment reporting. Our CODM allocates resources and evaluates the performance of our segments using information about its revenues, gross profit and income from operations, excluding certain costs which are managed separately at the corporate level. We enhanced our segment reporting structure to match our operating structure based on how our Chief Operating Decision Maker (“CODM”) views the business and allocates resources, beginning in the first quarter of 2015. Our CODM is our Chief Executive Officer. Retrospective adjustments of prior period financial information have been made to conform to the current period presentation.

The two operating segments, which are the same as our reportable segments, are as follows:

Automation and Analytics

The Automation and Analytics segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems, pharmacy inventory management systems, and related software. Our Automation and Analytics products are designed to enable our customers to enhance and improve the effectiveness of the medication-use process, the efficiency of the medical-surgical supply chain, overall patient care and clinical and financial outcomes of medical facilities. Through modular configuration and upgrades, our systems can be tailored to specific customer needs.

Medication Adherence

The Medication Adherence segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services. These products are used to manage medication administration outside of the hospital setting and include medication adherence products sold under the brand name MTS Medication Technologies ("MTS"), Surgichem Limited ("Surgichem"), and under the Omnicell and SureMed brands. MTS products consist of proprietary medication packaging systems and related products for use by institutional pharmacies servicing long-term care, and correctional facilities or retail pharmacies serving patients in their local communities.

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The following table summarizes the financial performance of our reportable segments, including a reconciliation of income from segment operations to income from total operations:



	Three Months Ended
	September 30, 2015						September 30, 2014
	Automation and Analytics		Medication Adherence		Total		Automation and Analytics		Medication Adherence		Total
	(In thousands)
Revenues	$	102,967	$	22,267	$	125,234	$	89,547	$	22,996	$	112,543
Cost of revenues	45,668		15,863		61,531		38,412		14,585		52,997
Gross profit	57,299		6,404		63,703		51,135		8,411		59,546
Operating expenses	30,628		6,070		36,698		27,420		4,822		32,242
Income from segment operations	$	26,671	$	334	$	27,005	$	23,715	$	3,589	$	27,304
Corporate costs					13,146						13,707
Income from operations					$	13,859					$	13,597



	Nine Months Ended
	September 30, 2015						September 30, 2014
	Automation and Analytics		Medication Adherence		Total		Automation and Analytics		Medication Adherence		Total
	(In thousands)
Revenues	$	284,447	$	69,796	$	354,243	$	255,748	$	63,611	$	319,359
Cost of revenues	123,923		47,470		171,393		109,344		39,934		149,278
Gross profit	160,524		22,326		182,850		146,404		23,677		170,081
Operating expenses	85,195		18,321		103,516		78,566		14,273		92,839
Income from segment operations	$	75,329	$	4,005	$	79,334	$	67,838	$	9,404	$	77,242
Corporate costs					42,672						41,133
Income from operations					$	36,662					$	36,109

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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, 2015 and three and nine months ended September 30, 2014.

Note 15. Subsequent Events

On October 29, 2015, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Aesynt Holding, L.P., Aesynt, Ltd. (together with Aesynt Holding, L.P., the “Sellers”) and Aesynt Coöperatief U.A. (“Aesynt”). Pursuant to the terms and conditions of the Securities Purchase Agreement, we will acquire from the Sellers, and the Sellers will sell to Omnicell, all of the outstanding interests of Aesynt on the closing date (such acquisition, the “Aesynt Acquisition”). Aesynt is a provider of automated medication management systems, including dispensing robots with storage solutions, medication storage and dispensing carts and cabinets, IV sterile preparation robotics and software, including software related to medication management. The contemplated total aggregate consideration is $275.0 million, in cash, plus cash on hand at signing minus indebtedness at close, or approximately $217.5 million, subject to certain adjustments at closing as provided for in the Securities Purchase Agreement. The closing of the acquisition is subject to certain closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act ("HSR") of 1976, as amended.

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be used to (i) refinance the loans under our existing senior secured credit facility, if any, and Aesynt’s existing senior secured credit facility, (ii) pay the purchase price for the Aesynt Acquisition, and (iii) pay any fees and expenses incurred in connection with any of the foregoing. The commitment to provide the loans under the Senior Credit Facilities is subject to certain conditions, including the negotiation of definitive documentation for the Senior Credit Facilities and other customary closing conditions.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS

This quarterly report on Form 10-Q contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. Forward-looking statements include, but are not limited to, statements about:


•	our expectations regarding our future product bookings, which consist of all firm orders, as evidenced by a contract and purchase order for equipment and software and, generally, by a purchase order for consumables. Equipment and software bookings are installable within 12 months and consumables are generally recorded as revenue within one month;


•	the extent and timing of future revenues, including the amounts of our current backlog, which represents firm orders that have not completed installation and therefore have not been recognized as revenue;


•	the size or growth of our market or market share;


•	the opportunity presented by new products, emerging markets and international markets;


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


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


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


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


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

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. We discuss many of these risks in this quarterly report in greater detail in Part II - Section 1A “Risk Factors” below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this quarterly report. You should also read this quarterly report and the documents that we reference in this quarterly report and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect. All references in this report to "Omnicell," "our," "us," "we," or the "Company" collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries. The term "Omnicell, Inc.," refers only to Omnicell, Inc., excluding its subsidiaries.

Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

OVERVIEW

Our Business

We are a leading provider of comprehensive automation and business analytics software solutions for patient-centric medication and supply management across the entire healthcare continuum, from the acute care hospital setting to post-acute skilled nursing and long-term care facilities to the home. Our Omnicell Automation and Analytics customers worldwide use our medication automation, supply chain and analytics solutions to help enable them to increase operational efficiency, reduce errors, deliver actionable intelligence and improve patient safety.

Omnicell Medication Adherence solutions, including the MTS, SureMed and Surgichem brands, provide innovative medication adherence packaging solutions that can help reduce costly hospital readmissions and enable institutional and retail pharmacies worldwide to maintain high accuracy and quality standards in medication dispensing and administration while optimizing productivity and controlling costs.

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We sell our product and consumable solutions together with related service offerings. Revenue generated in the United States represented 83% and 84% of our total revenues for the three and nine months ended September 30, 2015, respectively, and we expect our revenues from international operations to increase in future periods as we continue to grow our international business. We have not sold in the past, and have no future plans to sell our products either directly or indirectly, to customers located in countries that are identified as state sponsors of terrorism by the U.S. Department of State, and are subject to economic sanctions and export controls.

Operating Segments

Beginning in the first quarter of 2015, we have managed our business according to two operating segments, Automation and Analytics and Medication Adherence.

Automation and Analytics

Medication Adherence

The Medication Adherence segment primarily includes the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services. These products are used to manage medication administration outside of the hospital setting and include medication adherence products sold under the brand name MTS, Surgichem, SureMed and the Omnicell brand. MTS products consist of proprietary medication packaging systems and related products for use by institutional pharmacies servicing long-term care and correctional facilities or retail pharmacies serving patients in their local communities. Similarly, Surgichem is a provider of medication adherence packaging systems and solutions to the United Kingdom community and home care markets.

Strategy

The healthcare market is experiencing a period of substantive change. The adoption of electronic healthcare records, new regulatory constraints, and changes in the reimbursement structure have caused healthcare institutions to re-examine their operating structures, re-prioritize their investments, and seek efficiencies. We believe our customers’ evolving operating environment creates challenges for any supplier, but also affords opportunities for suppliers that are able to partner with customers to help them meet the changing demands. We have and intend to continue to invest in the strategies which we believe have generated and will continue to generate our revenue and earnings growth, while supporting our customers’ initiatives and needs. These strategies include:

•

Development of differentiated products. We invest in the development of products that we believe bring patient safety and workflow efficiency to our customers’ operations that they cannot get from other competing solutions. These differentiators may be as small as how a transaction operates or information provided on a report or as large as the entire automation of a workflow that would otherwise be completed manually. We intend to continue our focus on differentiating our products, and we carefully assess our investments regularly as we strive to ensure those investments provide the solutions most valuable to our customers.

•

Deliver our solutions to new markets. Areas of healthcare where work is done manually may benefit from our existing solutions. These areas include hospitals that continue to utilize manual operations, healthcare segments of the U.S. market outside hospitals and markets outside the United States. We weigh the cost of entering these new markets against the expected benefits and focus on the markets that we believe are most likely to adopt our products.

•

Expansion of our solutions through acquisitions and partnerships. Our acquisitions have generally been focused on automation of manual workflows or data analytics, which is the enhancement of data for our customers’ decision-making processes. We believe that expansion of our product lines through acquisition and partnerships to meet our customers changing and evolving expectations is a key component to our historical and future success.

Our investments have been consistent with the strategies outlined above. To differentiate our solutions from others available in the market, we began shipping a refresh of our product line in 2011, which we market as G4. The G4 refresh included multiple new products and an upgraded 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 73%

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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: the United Kingdom and Germany where we sell automation and analytics and medication adherence products through a direct sales team; Middle Eastern countries of the Arabian Peninsula where new healthcare facility construction is taking place; and China, where we launched a Mandarin version of our automated dispensing systems in 2011. We have also expanded our sales efforts to medication adherence customers in the United States, which has allowed us to sell our automated dispensing solutions and other products to this market.

Expansion of our solutions through acquisitions and partnerships include our acquisition of MTS in 2012, our acquisition of Surgichem in August 2014, and our acquisitions of Mach4 and Avantec in April 2015. Surgichem is a provider of medication adherence products in the United Kingdom. Mach4 is a provider of automated medication management systems to retail and hospital pharmacy customers primarily in Europe, with additional installations in China, the Middle East and Latin America. Avantec develops medication and supply automation products that complement our solutions for configurations suited to the United Kingdom marketplace, and has been the exclusive United Kingdom distributor for our medication and supply automation solutions since 2005. We have also developed relationships with major providers of hospital information management systems with the goal of enhancing the interoperability of our products with their systems. We believe that enhanced interoperability will help reduce implementation costs, time, and maintenance for shared clients, while providing new clinical workflows designed to enhance efficiency and patient safety.

We believe that the success of our three-leg strategy of differentiated products, expansion into new markets, and acquisition and partnership in future periods will be based on, among other factors:


•	Our expectation that the overall market demand for healthcare services will increase as the population grows, life expectancies continue to increase and the quality and availability of healthcare services increases;


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


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

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

In addition to product solution sales, we provide services to our customers. Our healthcare customers expect a high degree of partnership involvement from their technology suppliers throughout their ownership of the products. We provide extensive installation planning and consulting as part of every product sale and included in the initial price of the solution. Our customers' medication control systems are mission critical to their success and our customers require these systems to be functional at all times. To help assure the maximum availability of our systems, our customers typically purchase maintenance and support contracts in one, two or five year increments. As a result of the growth of our installed base of customers, our service revenues have also grown. We strive to provide the best service possible, as measured by third-party rating agencies and by our own surveys, to assure our customers continue to seek service maintenance from us. Our liabilities include current and long-term deferred service revenue of $44.6 million and $45.5 million as of September 30, 2015 and December 31, 2014, respectively. Our deferred service revenue will be amortized to service revenue as the service contracts are executed.

The growth in our Automation and Analytics revenue for the three and nine months ended September 30, 2015 was driven primarily by our success in consistently growing the number of our customer installations. Installed customers in the United States grew to 2,023 hospitals as of September 30, 2015 from 1,886 hospitals as of September 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

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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 nine months ended September 30, 2015.

The growth in our Medication Adherence revenue for the nine months ended September 30, 2015 was driven primarily by the inclusion of Surgichem operations which was acquired in August 2014 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 year.

In the future, we expect our strategies to evolve as the business environment of our customers evolves, but for our focus to remain on improving healthcare with solutions that help change practices in ways that improve patient and provider outcomes. We expect our investment in differentiated products, new markets, and acquisitions and partnerships to continue. In 2015, we also intend to manage our business to operating profit margins similar to those achieved in 2014.

Pending Aesynt Acquisition

On October 29, 2015, we entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Aesynt Holding, L.P., Aesynt, Ltd. (together with Aesynt Holding, L.P., the “Sellers”) and Aesynt Coöperatief U.A. (“Aesynt”). Pursuant to the terms and conditions of the Securities Purchase Agreement, we will acquire from the Sellers, and the Sellers will sell to us, all of the outstanding interests of Aesynt on the closing date (such acquisition, the “Aesynt Acquisition”). Aesynt is a provider of automated medication management systems, including dispensing robots with storage solutions, medication storage and dispensing carts and cabinets, IV sterile preparation robotics and software, including software related to medication management. The contemplated total aggregate consideration is $275.0 million, in cash, plus cash on hand at signing minus indebtedness at close, or approximately $217.5 million, subject to certain adjustments at closing as provided for in the Securities Purchase Agreement. The closing of the Aesynt Acquisition is subject to certain closing conditions, including the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended.

In connection with the Securities Purchase Agreement, we entered into a commitment letter with Wells Fargo Bank, National Association (“Wells Fargo Bank”) and Wells Fargo Securities, LLC (“Wells Fargo Securities” and, together with Wells Fargo Bank, the “Commitment Parties”) on October 29, 2015, pursuant to which Wells Fargo Bank has committed to provide $300.0 million of senior secured credit facilities consisting of (a) a $200.0 million term loan facility, and (b) $100.0 million revolving credit facility (collectively, the “Senior Credit Facilities”), a portion of which, together with our existing cash on hand, would be used to (i) refinance the loans under Omnicell’s existing senior secured credit facility, if any, and Aesynt’s existing senior secured credit facility, (ii) pay the purchase price for the Aesynt Acquisition, and (iii) pay any fees and expenses incurred in connection with any of the foregoing. The commitment to provide the loans under the Senior Credit Facilities is subject to certain conditions, including the negotiation of definitive documentation for the Senior Credit Facilities and other customary closing conditions.

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);


•	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.

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There have been no material changes in the matters for which we make critical accounting estimates in the preparation of our Condensed Consolidated Financial Statements during the three and nine months ended September 30, 2015 as compared to those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2014.

Recently issued authoritative guidance

Refer to Note 1, Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements in this quarterly report for a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects on our results of operations, financial positions and cash flows.

RESULTS OF OPERATIONS

Total Revenues



	Three months ended September 30,
							Change in
	2015			2014			$		%
	(Dollars in thousands)
Product revenues	$	100,941		$	92,229		8,712		9	%
Percentage of total revenues	81		%	82		%
Service and other revenues	24,293			20,314			3,979		20	%
Percentage of total revenues	19		%	18		%
Total revenues	$	125,234		$	112,543		$	12,691	11	%

Product revenues represented 81% and 82% of total revenues for the three months ended September 30, 2015 and September 30, 2014, respectively. Product revenues increased due to increased sales for Automation and Analytics segment of $9.5 million, partially offset by the decrease of $0.8 million in our Medication Adherence segment. The increase in our Automation and Analytics segment is attributed to larger orders received from our customers and the newly acquired companies Mach4 and Avantec, which contributed approximately $4.7 million to the increase in the product revenue compared to three months ended September 30, 2014. The decrease in Medication Adherence segment is attributed to lower sales in the consumable and equipment product sales compared to the three months ended September 30, 2014.

Service and other revenues represented 19% and 18% of total revenues for the three months ended September 30, 2015 and September 30, 2014, 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 $3.9 million. The newly acquired companies Mach4 and Avantec contributed approximately $2.0 million to the service revenue of Automation and Analytics segment for the three months ended September 30, 2015. Service and other revenues from Medication Adherence segment increased $0.1 million for the three months ended September 30, 2015 compared to the same period last year.

Our international sales represented 17% and 10% of total revenues for the three months ended September 30, 2015 and September 30, 2014, respectively, and are expected to be affected by foreign currency exchange rates fluctuations. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates.



	Nine Months Ended September 30,
							Change in
	2015			2014			$		%
	(Dollars in thousands)
Product revenues	$	284,204		$	260,053		24,151		9	%
Percentage of total revenues	80		%	81		%
Service and other revenues	70,039			59,306			10,733		18	%
Percentage of total revenues	20		%	19		%
Total revenues	$	354,243		$	319,359		$	34,884	11	%

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Product revenues represented 80% and 81% of total revenues for the nine months ended September 30, 2015 and September 30, 2014, respectively. Product revenues increased due to increased sales for both our Automation and Analytics segment of $18.0 million and Medication Adherence segment of $6.2 million. The newly acquired companies Mach4 and Avantec contributed approximately $7.6 million to the Automation and Analytics segment for the nine months ended September 30, 2015.

Service and other revenues represented 20% and 19% of total revenues for the nine months ended September 30, 2015 and September 30, 2014, 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 $10.7 million. The newly acquired companies Mach4 and Avantec contributed approximately $3.2 million to the service revenue of Automation and Analytics segment for the nine months ended September 30, 2015.

Our international sales represented 16% and 8% of total revenues for the nine months ended September 30, 2015 and September 30, 2014, respectively, and are expected to be affected by foreign currency exchange rates fluctuations. We are unable to predict the extent to which revenue in future periods will be impacted by changes in foreign currency exchange rates.

We anticipate our revenues will continue to increase in 2015 compared to the same periods in 2014 as we fulfill our existing orders and based on our growth in bookings in 2014 and in the first nine months of 2015, some of which will be recognized as revenue in 2015. Our ability to continue to grow revenue is dependent on our ability to continue to obtain orders from customers, our ability to produce quality consumables to fulfill customer demand, the volume of installations we are able to complete, our ability to meet customer needs by providing a quality installation experience, and our flexibility in manpower allocations among customers to complete installations on a timely basis. The timing of our product revenues for equipment is primarily dependent on when our customers’ schedules allow for installations.

Financial Information by Segment

Revenues



	Three months ended September 30,
							Change in
	2015			2014			$			%
Revenues:	(Dollars in thousands)
Automation and Analytics	$	102,967		$	89,547		$	13,420		15	%
Percentage of total revenues	82		%	80		%
Medication Adherence	22,267			22,996			(729		)	(3	)%
Percentage of total revenues	18		%	20		%
Total revenues	$	125,234		$	112,543		$	12,691		11	%

The increase in Automation and Analytics revenues for the three months ended September 30, 2015 in comparison to the three months ended September 30, 2014 was due to an increase in product revenue which contributed $9.5 million to the increase, and service and other revenues of $3.9 million. The increase in product and service revenue was primarily due to newly acquired companies Mach4 and Avantec which accounted for $4.7 million and $2.0 million of the increase in product and service revenue, respectively. Larger deal sizes primarily due to customer conversions, also contributed to the increase in product revenue in the three months ended September 30, 2015.

Medication Adherence revenues decreased for the three months ended September 30, 2015 in comparison to the three months ended September 30, 2014 primarily due to the decrease in the product revenues, particularly in the consumable and

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equipment product sales.



	Nine months ended September 30,
				Change in
	2015			2014			$		%
Revenues:	(Dollars in thousands)
Automation and Analytics	$	284,447		$	255,748		$	28,699	11	%
Percentage of total revenues	80		%	80		%
Medication Adherence	69,796			63,611			6,185		10	%
Percentage of total revenues	20		%	20		%
Total revenues	$	354,243		$	319,359		$	34,884	11	%

The increase in Automation and Analytics revenues for the nine months ended September 30, 2015 in comparison to the nine months ended September 30, 2014 was due to an increase in product revenues of $18.0 million primarily due to the larger deal sizes, mainly attributable to competitive conversions, and revenue from the newly acquired companies Mach4 and Avantec, which contributed $7.6 million to the increase in product revenue. Service and other revenues increased by $10.7 million primarily from higher service renewal fees driven mainly by an increase in installed customer base and $3.2 million due to the newly acquired companies Mach4 and Avantec.

Medication Adherence revenues increased for the nine months ended September 30, 2015 in comparison to the nine months ended September 30, 2014, primarily due to an increase in product revenues of $6.9 million. The increase in product revenue was largely driven by the inclusion of Surgichem operations since its acquisition in August 2014 which contributed approximately $8.4 million, which was partially offset by lower equipment sales in the nine months ended September 30, 2015 in comparison to the same period of 2014. Service and other revenues remained relatively flat compared to the prior year.

Cost of Revenues and Gross Profit

Cost of revenues is primarily comprised of three general categories: (i) standard product costs which accounts for the majority of the product cost of revenues that are provided to customers, and are inclusive of purchased material, labor to build the product and overhead costs associated with production; (ii) installation costs as we install our equipment at the customer site and include costs of the field installation personnel, including labor, travel expense, and other expenses; and (iii) other costs, including variances in standard costs and overhead, scrap costs, rework, warranty, provisions for excess and obsolete inventory and amortization of software development costs and intangibles.



	Three months ended September 30,
							Change in
	2015			2014			$			%
Cost of revenues:	(Dollars in thousands)
Automation and Analytics	$	45,668		$	38,412		$	7,256		19	%
As a percentage of related revenues	44		%	43		%
Medication Adherence	15,863			14,585			1,278			9	%
As a percentage of related revenues	71		%	63		%
Total cost of revenues	$	61,531		$	52,997		$	8,534		16	%
As a percentage of total revenues	49		%	47		%

Gross profit:
Automation and Analytics	$	57,299		$	51,135		$	6,164		12	%
Automation and Analytics gross margin	56		%	57		%
Medication Adherence	6,404			8,411			(2,007		)	(24	)%
Medication Adherence gross margin	29		%	37		%
Total gross profit	$	63,703		$	59,546		$	4,157		7	%
Total gross margin	51		%	53		%

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	Nine months ended September 30,
							Change in
	2015			2014			$		%
Cost of revenues:	(Dollars in thousands)
Automation and Analytics	$	123,923		$	109,344		$	14,579	13	%
As a percentage of related revenues	44		%	42		%
Medication Adherence	47,470			39,934