Edgar Filing: OMNICELL, Inc

Document

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 March 31, 2019
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 every Interactive Data File required to be submitted 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ý	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o	Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transitions period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.				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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Name of each exchange on which registered	Ticker Symbol
Common Stock, $0.001 par value	The NASDAQ Stock Market LLC	OMCL

As of April 26, 2019, there were 41,218,603 shares of the registrant’s common stock, $0.001 par value, outstanding.

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OMNICELL, INC.

TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018	3
	Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and March 31, 2018	4
	Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and March 31, 2018	5
	Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and March 31, 2018	6
	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and March 31, 2018	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	34
Item 4.	Controls and Procedures	35

PART II	OTHER INFORMATION	36
Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	52
Item 3.	Defaults Upon Senior Securities	52
Item 4.	Mine Safety Disclosures	52
Item 5.	Other Information	52
Item 6.	Exhibits	53

Signature		54

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PART I. FINANCIAL INFORMATION

ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

OMNICELL, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



	March 31, 2019			December 31, 2018
	(In thousands, except par value)
ASSETS
Current assets:
Cash and cash equivalents	$	77,244		$	67,192
Accounts receivable and unbilled receivables, net of allowances of $3,881 and $2,582, respectively	203,489			196,238
Inventories	103,909			100,868
Prepaid expenses	17,048			20,700
Other current assets	12,017			12,136
Total current assets	413,707			397,134
Property and equipment, net	52,039			51,500
Long-term investment in sales-type leases, net	19,469			17,082
Operating lease right-of-use assets	63,851			—
Goodwill	336,119			335,887
Intangible assets, net	138,893			143,686
Long-term deferred tax assets	32,043			15,197
Prepaid commissions	43,669			46,143
Other long-term assets	77,270			74,613
Total assets	$	1,177,060		$	1,081,242

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	38,466		$	38,038
Accrued compensation	29,056			41,660
Accrued liabilities	52,996			43,047
Deferred revenues, net	90,104			81,835
Total current liabilities	210,622			204,580
Long-term deferred revenues	10,302			10,582
Long-term deferred tax liabilities	61,405			41,484
Long-term operating lease liabilities	57,470			—
Other long-term liabilities	9,786			9,562
Long-term debt, net	96,990			135,417
Total liabilities	446,575			401,625
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $0.001 par value, 5,000 shares authorized; no shares issued	—			—
Common stock, $0.001 par value, 100,000 shares authorized; 50,351 and 49,480 shares issued; 41,206 and 40,335 shares outstanding, respectively	50			50
Treasury stock at cost, 9,145 shares outstanding, respectively	(185,074		)	(185,074		)
Additional paid-in capital	725,273			678,041
Retained earnings	200,738			197,454
Accumulated other comprehensive loss	(10,502		)	(10,854		)
Total stockholders’ equity	730,485			679,617
Total liabilities and stockholders’ equity	$	1,177,060		$	1,081,242

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 (UNAUDITED)



	Three months ended March 31,
	2019			2018
	(In thousands, except per share data)
Revenues:
Product revenues	$	145,610		$	130,659
Services and other revenues	56,907			51,960
Total revenues	202,517			182,619
Cost of revenues:
Cost of product revenues	78,811			75,417
Cost of services and other revenues	26,589			24,747
Total cost of revenues	105,400			100,164
Gross profit	97,117			82,455
Operating expenses:
Research and development	16,078			16,537
Selling, general, and administrative	68,278			65,285
Total operating expenses	84,356			81,822
Income from operations	12,761			633
Interest and other income (expense), net	(1,410		)	(2,729		)
Income (loss) before provision for income taxes	11,351			(2,096		)
Provision for (benefit from) income taxes	8,067			(4,816		)
Net income	$	3,284		$	2,720
Net income per share:
Basic	$	0.08		$	0.07
Diluted	$	0.08		$	0.07
Weighted-average shares outstanding:
Basic	40,692			38,635
Diluted	42,281			39,691

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 (UNAUDITED)



	Three months ended March 31,
	2019			2018
	(In thousands)
Net income	$	3,284		$	2,720
Other comprehensive income, net of reclassification adjustments:
Unrealized gains (losses) on interest rate swap contracts	(317		)	202
Foreign currency translation adjustments	669			2,472
Other comprehensive income	352			2,674
Comprehensive income	$	3,636		$	5,394

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

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OMNICELL, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)



	Common Stock			Treasury Stock					Additional Paid-In Capital			Accumulated Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
	Shares	Amount		Shares		Amount			Additional Paid-In Capital			Accumulated Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
	(In thousands)
Balances as of December 31, 2018	49,480	$	50	(9,145	)	$	(185,074	)	$	678,041		$	197,454	$	(10,854	)	$	679,617
Net income	—	—		—		—			—			3,284		—			3,284
Other comprehensive income	—	—		—		—			—			—		352			352
At the market equity offering, net of costs	243	—		—		—			20,216			—		—			20,216
Share-based compensation	—	—		—		—			8,410			—		—			8,410
Issuance of common stock under employee stock plans	628	—		—		—			20,526			—		—			20,526
Tax payments related to restricted stock units	—	—		—		—			(1,920		)	—		—			(1,920		)
Balances as of March 31, 2019	50,351	$	50	(9,145	)	$	(185,074	)	$	725,273		$	200,738	$	(10,502	)	$	730,485



	Common Stock			Treasury Stock					Additional Paid-In Capital			Accumulated Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
	Shares	Amount		Shares		Amount			Additional Paid-In Capital			Accumulated Earnings		Accumulated Other Comprehensive Income (Loss)			Stockholders’ Equity
	(In thousands)
Balances as of December 31, 2017	47,577	$	48	(9,145	)	$	(185,074	)	$	585,756		$	159,722	$	(6,113	)	$	554,339
Net income	—	—		—		—			—			2,720		—			2,720
Other comprehensive income	—	—		—		—			—			—		2,674			2,674
Share-based compensation	—	—		—		—			6,528			—		—			6,528
Issuance of common stock under employee stock plans	428	—		—		—			9,541			—		—			9,541
Tax payments related to restricted stock units	—	—		—		—			(1,300		)	—		—			(1,300		)
Balances as of March 31, 2018	48,005	$	48	(9,145	)	$	(185,074	)	$	600,525		$	162,442	$	(3,439	)	$	574,502

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)



	Three months ended March 31,
	2019			2018
	(In thousands)
Operating Activities
Net income	$	3,284		$	2,720
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization	12,637			12,310
Loss on disposal of fixed assets	355			—
Share-based compensation expense	8,410			6,528
Deferred income taxes	3,075			(5,128		)
Amortization of operating lease right-of-use assets	2,602			—
Amortization of debt financing fees	573			573
Changes in operating assets and liabilities:
Accounts receivable and unbilled receivables	(7,251		)	(632		)
Inventories	(2,936		)	(6,881		)
Prepaid expenses	3,652			(769		)
Other current assets	373			(997		)
Investment in sales-type leases	(2,641		)	(1,491		)
Prepaid commissions	2,474			1,796
Other long-term assets	5,206			(1,673		)
Accounts payable	(233		)	(9,416		)
Accrued compensation	(12,604		)	2,391
Accrued liabilities	127			4,276
Deferred revenues	7,989			15,118
Operating lease liabilities	(2,669		)	—
Other long-term liabilities	4,074			131
Net cash provided by operating activities	26,497			18,856
Investing Activities
Software development for external use	(11,717		)	(5,272		)
Purchases of property and equipment	(4,980		)	(9,268		)
Net cash used in investing activities	(16,697		)	(14,540		)
Financing Activities
Repayment of debt and revolving credit facility	(39,000		)	(2,500		)
At the market offering, net of offering costs	20,216			—
Proceeds from stock issuances under stock-based compensation plans	20,526			9,541
Employees’ taxes paid related to restricted stock units	(1,920		)	(1,300		)
Net cash provided by (used in) financing activities	(178		)	5,741
Effect of exchange rate changes on cash and cash equivalents	430			1,292
Net increase in cash and cash equivalents	10,052			11,349
Cash and cash equivalents at beginning of period	67,192			32,424
Cash and cash equivalents at end of period	$	77,244		$	43,773
Supplemental disclosure of non-cash activities
Unpaid purchases of property and equipment	$	1,454		$	676
Property and equipment transferred to inventory	$	105		$	—
Right-of-use assets obtained in exchange for new operating lease liabilities	$	431		$	—

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. The Company’s major products are medication and supply dispensing automation solutions, central pharmacy automation solutions, analytics software, and medication adherence solutions which are sold in its principal market, which is the healthcare industry. The Company’s market is primarily located in the United States and Europe. “Omnicell” 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 March 31, 2019 and December 31, 2018, and the results of operations, comprehensive income, and cash flows for the three months ended March 31, 2019 and 2018. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying Notes included in the Company’s annual report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 27, 2019, except as discussed in the sections entitled “Lessor Leases”, “Lessee Leases’, and “Recently Adopted Authoritative Guidance” below. The Company’s results of operations, comprehensive income, and cash flows for the three months ended March 31, 2019 are not necessarily indicative of results that may be expected for the year ending December 31, 2019, or for any future period.

The Company reclassified $0.6 million from services and other revenues to product revenues for the three months ended March 31, 2018 related to software term-license sales to conform with current period presentation. This reclassification did not have a material impact on the condensed consolidated financial statements.

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.

Segment Reporting

The Company's Chief Operating Decision Maker ("CODM") is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company using information about its revenues, gross profit, income from operations, and other key financial data. The Company previously operated and reported its business in two segments: Automation and Analytics, and Medication Adherence. In the fourth quarter of 2018, the Company introduced its vision of the Autonomous Pharmacy, a more fully automated and digitized system of medication management, in order to address changes in the healthcare industry as the Company executes on its plan to deliver end-to-end solutions with greater emphasis on automating manual processes for its customers. These industry changes include the continuing consolidation of healthcare systems, rising pharmaceutical costs, and increased scrutiny on controlled substances. In an effort to deliver on its strategic vision, the Company initiated a company-wide organizational realignment in the fourth quarter of 2018 to centrally manage its business operations, including the development and marketing of all of the Company’s products, sales and distribution, supply chain and inventory management, as well as regulatory and quality functions. As a result of this organizational realignment, all significant operating decisions are based upon an analysis of the Company as one operating segment. Therefore, effective January 1, 2019, the Company started reporting as only one operating segment, which is the same as the reporting segment. Accordingly, prior period information has been revised to conform with current period presentation.

Use of Estimates

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company’s critical accounting policies are

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those that affect its financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition; accounts receivable and notes receivable from investment in sales-type leases; operating lease right-of-use assets and liabilities; inventory valuation; capitalized software development costs; impairment of goodwill; purchased intangibles and long-lived assets; share-based compensation; and accounting for income taxes.

Lessor Leases

The Company determines if an arrangement is a lease at inception. The transaction price is allocated to separate performance obligations, generally consisting of hardware and software products, installation, and post-installation technical support, proportionally based on the standalone selling price of each performance obligation. Standalone selling price is best evidenced by the price the Company charges for the good or service when selling it separately in similar circumstances to similar customers. Other than for the renewal of annual support services contracts, the Company’s products and services are not generally sold separately. The Company uses an amount discounted from the list price as a best estimated selling price.

Sales-Type Leases

The Company enters into non-cancelable sales-type lease arrangements, most of which do not have an option to extend the lease term. At the end of the lease term, the customer must either return the equipment or negotiate a new agreement, resulting in a new purchase or lease transaction. Failure of the customer to either return the equipment or negotiate a new agreement results in the contract becoming a month-to-month rental. Certain sales-type leases automatically renew for successive one year periods at the end of each lease term with written notice from the customer. The Company’s sales-type lease agreements do not contain any material residual value guarantees.

For sales-type leases, the Company recognizes revenues for its hardware and software products, net of lease execution costs, post-installation product maintenance, and technical support, at the net present value of the lease payment stream upon customer acceptance. The Company recognizes service revenues associated with the sales-type leases ratably over the term of the agreement in service revenues on the Condensed Consolidated Statements of Operations. The Company recognizes interest income from sales-type leases using the effective interest method. Both hardware and software revenues, and interest income from sales-types leases are recorded in product revenues on the Condensed Consolidated Statements of Operations.

The Company optimizes cash flows by selling a majority of its non-U.S. government sales-type leases to third-party leasing finance companies on a non-recourse basis. The Company has no obligation to the leasing company once the lease has been sold. Some of the Company's sales-type leases, mostly those relating to U.S. government hospitals which comprise approximately 44% of the lease receivable balance, are retained in-house.

Operating Leases

The Company entered into certain leasing agreements that were classified as operating leases prior to the adoption of the new lease accounting standard. Those agreements in place prior to January 1, 2019 will continue to be treated as operating leases, however any new leasing agreements entered into on or after January 1, 2019 under these programs are classified and accounted for as sales-type leases in accordance with the new lease accounting standard. The operating lease arrangements entered into prior to January 1, 2019 are non-cancelable, and most automatically renew for successive one year periods at the end of each lease term absent written notice from the customer. The Company’s operating lease agreements do not contain any material residual value guarantees.

For operating leases, rental income is generally recognized on a straight-line basis over the term of the associated lease, and recorded in revenues in the Condensed Consolidated Statements of Operations. Leased assets under operating leases are carried at amortized cost net of accumulated depreciation in property and equipment, net on the Condensed Consolidated Balance Sheets. The depreciation expense of the leased assets is recognized on a straight-line basis over the contractual term of the associated lease, and recorded in cost of revenues in the Condensed Consolidated Statements of Operations.

Lessee Leases

The Company determines if an arrangement is a lease at inception. Operating lease right-of-use assets and liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. As most of our lease contracts do not provide an implicit rate, the Company uses its incremental borrowing rate based on information available at the commencement date in determining the present value of the lease payments.

Many of the Company’s operating leases include an option to extend the lease. The specific terms and conditions of the extension options vary from lease to lease, but are consistent with standard industry practices in each area that the Company operates. The Company reviews each of its lease options at a time required by the terms of the lease contract, and notifies the lessor if it chooses to exercise the lease renewal option. Until the Company is reasonably certain that it will extend the lease contract, the renewal option periods will not be recognized as right-of-use assets or lease liabilities.

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Certain leases include provisions for early termination, which allows the contract parties to terminate their obligations under the lease contract. The terms and conditions of the termination options vary by contract. When the Company has made a decision to exercise an early termination option, the right-of-use assets and associated lease liabilities are remeasured in accordance with the present value of the remaining cash flows under the lease contract.

Certain building lease agreements include rental payments subject to change annually based on fluctuations in various indexes (i.e. Consumer Price Index (“CPI”), Retail Price Index, and other international indexes). Certain data center lease agreements include rental payments subject to change based on usage and CPI fluctuations. The changes based on usage and indexes are treated as variable lease costs and recognized in the period in which the obligation for those payments was incurred.

The Company’s operating lease agreements do not contain any material residual value guarantees, restrictions, or restriction covenants.

Recently Adopted Authoritative Guidance

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). The FASB amended lease accounting requirements to begin recording assets and liabilities arising from most leases on the balance sheet. The new guidance also requires significant additional disclosures about the amount and timing of cash flows from leases. The Company adopted this new guidance on January 1, 2019. In July 2018, the FASB issued amendments in ASU 2018-11, which provide a transition election to not restate comparative periods for the effects of applying the new standard. This transition election permits entities to change the date of initial application to the beginning of the year of adoption and to recognize the effects of applying the new standard as a cumulative-effect adjustment to the opening balance of retained earnings. The Company has elected this transition approach as well as elected the package of practical expedients permitted under the transition guidance within the new standard, which will allow the Company to carry forward the historical lease classification of contracts entered into prior to January 1, 2019. As a result of electing the package of practical expedients described above, existing leases and related initial direct costs have not been reassessed prior to the effective date, and therefore, adoption of the lease standard did not have an impact on the Company’s previously reported consolidated statements.

The Company also elected the following practical expedients: (i) combining lease and non-lease components, (ii) leases with an initial term of 12 months or less are not recorded in the Condensed Consolidated Balance Sheets, and the associated lease payments are recognized in the Condensed Consolidated Statements of Operations on a straight-line basis over the lease term, and (iii) applying discount rates to operating leases using a portfolio approach.

From a lessor perspective, certain agreements that were previously classified as operating leases are classified as sales-type leases under the new lease accounting standard. The agreements in place prior to the adoption of the new lease accounting standard on January 1, 2019 will continue to be treated as operating leases.

The Company’s adoption of the new standard impacted the Condensed Consolidated Balances Sheets at the beginning of the period of adoption as follows:



	January 1, 2019
	Pre-ASC 842 Balances		ASC 842 Adoption Impact			Post-ASC 842 Balances
	(In thousands)
Operating lease right-of-use assets	$	—	$	66,008		$	66,008
Accrued liabilities ⁽¹⁾	43,047		10,067			53,114
Long-term operating lease liabilities	—		59,791			59,791
Other long-term liabilities ⁽²⁾	9,562		(3,850		)	5,712

_________________________________________________


⁽¹⁾	Adjustment represents the current portion of the operating lease liabilities of $10.3 million, and reclassification of exit cost obligations and deferred rent of $0.1 million and $0.1 million, respectively, to reduce the operating lease right-of-use assets.


⁽²⁾	Adjustment represents the reclassification of deferred rent to reduce the operating lease right-of-use assets.

Adoption of the standard did not have an impact on the Company’s stockholders’ equity, Condensed Consolidated Statements of Operations, and Condensed Consolidated Statements of Cash Flows as of January 1, 2019.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits the reclassification of the income tax effects of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”) on items within accumulated other comprehensive income to retained earnings. These amounts are commonly referred to as “stranded tax effects.” ASU 2018-02 is effective for the Company beginning January 1, 2019. The adoption of

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this guidance did not have a material effect on the Company’s consolidated financial statements and therefore no adjustment to retained earnings was made.

Recently Issued Authoritative Guidance

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 will be effective for the Company beginning January 1, 2020. The Company is currently evaluating the impact ASU 2018-15 will have on its consolidated financial statements.

There was no other recently issued and effective authoritative guidance that is expected to have a material impact on the Company’s Condensed Consolidated Financial Statements through the reporting date.

Note 2. Revenues

Revenue Recognition

The Company earns revenues from sales of its medication and supply dispensing automation systems, along with consumables and related services, which are sold in the healthcare industry, its principal market. The Company’s customer arrangements typically include one or more of the following performance obligations:

Products. Software-enabled equipment that manages and regulates the storage and dispensing of pharmaceuticals, consumable blister cards and packaging equipment and other medical supplies.

Software. Additional software applications that enable incremental functionality of the Company’s equipment or services.

Installation. Installation of equipment as integrated systems at customer sites.

Post-installation technical support. Phone support, on-site service, parts, and access to unspecified software updates and enhancements, if and when available.

Professional services. Other customer services, such as training and consulting.

A portion of the Company’s sales are made to customers who are members of Group Purchasing Organizations (“GPOs”). GPOs are often owned fully or in part by the Company’s customers, and the Company pays fees to the GPO on completed contracts. The Company considers these fees consideration paid to customers and records them as reductions to revenue. Fees to GPOs were $2.2 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively.

Disaggregation of Revenues

The following table summarizes the Company’s product revenues disaggregated by revenue type for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
	2019		2018
	(In thousands)
Hardware and software	$	120,221	$	107,451
Consumables	21,087		19,438
Other	4,302		3,770
Total product revenues	$	145,610	$	130,659

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The following table summarizes the Company’s revenues disaggregated by geographic region, which is determined based on customer location, for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
	2019		2018
	(In thousands)
United States	$	180,020	$	158,202
Rest of world ⁽¹⁾	22,497		24,417
Total revenues	$	202,517	$	182,619

_________________________________________________


⁽¹⁾	No individual country represented more than 10% of the respective totals.

Contract Assets and Contract Liabilities

The following table reflects the Company’s contract assets and contract liabilities:



	March 31, 2019		December 31, 2018
	(In thousands)
Short-term unbilled receivables - included in accounts receivable and unbilled receivables	$	8,708	$	9,191
Long-term unbilled receivables - included in other long-term assets	11,423		16,481
Total contract assets	$	20,131	$	25,672

Short-term deferred revenues, net	$	90,104	$	81,835
Long-term deferred revenues	10,302		10,582
Total contract liabilities	$	100,406	$	92,417

The portion of the transaction price allocated to the Company’s unsatisfied performance obligations is recorded as deferred revenues.

Short-term deferred revenues of $90.1 million and $81.8 million include deferred revenues from product sales and service contracts, net of deferred cost of sales, of $12.2 million and $11.1 million as of March 31, 2019 and December 31, 2018, respectively. The short-term deferred revenues from product sales relate to delivered and invoiced products, pending installation and acceptance, expected to occur within the next twelve months. During the three months ended March 31, 2019, the Company recognized revenues of $39.3 million that were included in the corresponding gross short-term deferred revenues balance of $92.9 million as of December 31, 2018.

Long-term deferred revenues include deferred revenues from service contracts of $10.3 million and $10.6 million as of March 31, 2019 and December 31, 2018, respectively. Remaining performance obligations primarily relate to maintenance contracts and are recognized ratably over the remaining term of the contract, generally not more than five years.

Significant Customers

There were no customers that accounted for more than 10% of the Company’s total revenues for the three months ended March 31, 2019 and 2018. Also, there were no customers that accounted for more than 10% of the Company’s accounts receivable as of March 31, 2019 and December 31, 2018.

Note 3. Net Income Per Share

Basic net income per share is computed by dividing net income for the period by the weighted-average number of shares outstanding during the period. In periods of net loss, all potential common shares are anti-dilutive, so diluted net loss per share equals the basic net loss per share. In periods of net income, diluted net income per share is computed by dividing net income for the period by the basic weighted-average number of shares plus any dilutive potential common stock outstanding during the period. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards, and restricted stock units computed using the treasury stock method. Any anti-dilutive weighted-average dilutive shares related to stock award plans are excluded from the computation of the diluted net income per share.

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The basic and diluted net income per share calculation for the three months ended March 31, 2019 and 2018 was as follows:



	Three months ended March 31,
	2019		2018
	(In thousands, except per share data)
Net income	$	3,284	$	2,720
Weighted-average shares outstanding — basic	40,692		38,635
Effect of dilutive securities from stock award plans	1,589		1,056
Weighted-average shares outstanding — diluted	42,281		39,691
Net income per share - basic	$	0.08	$	0.07
Net income per share - diluted	$	0.08	$	0.07

Anti-dilutive weighted-average shares related to stock award plans	635		1,113

Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments

Cash and cash equivalents of $77.2 million and $67.2 million as of March 31, 2019 and December 31, 2018, respectively, consisted of bank accounts with major financial institutions.

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 interest rate swap contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of March 31, 2019:



	Level 1		Level 2		Level 3		Total
	(In thousands)
Interest rate swap contracts	$	—	$	136	$	—	$	136
Total financial assets	$	—	$	136	$	—	$	136

The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of December 31, 2018:



	Level 1		Level 2		Level 3		Total
	(In thousands)
Interest rate swap contracts	$	—	$	562	$	—	$	562
Total financial assets	$	—	$	562	$	—	$	562

Interest Rate Swap Contracts

The Company uses interest rate swap agreements to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company’s interest rate swaps, which are designated as cash flow hedges, involve the receipt of variable amounts from counterparties in exchange for the Company making fixed-rate payments over the life of the agreements. The Company does not hold or issue any derivative financial instruments for speculative trading purposes.

During 2016, the Company entered into an interest rate swap agreement with a combined notional amount of $100.0 million with one counterparty that became effective on June 30, 2016 and is maturing on April 30, 2019. The swap agreement requires the Company to pay a fixed rate of 0.8% and provides that the Company will receive a variable rate based on the one month LIBOR rate subject to a LIBOR floor of 0.0%. Amounts payable by or due to the Company will be net settled with the respective counterparty on the last business day of each month, commencing July 31, 2016.

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The fair value of the interest rate swap agreements at March 31, 2019 and December 31, 2018 was $0.1 million and $0.6 million, respectively. There were no amounts reclassified into current earnings due to ineffectiveness during the periods presented.

Note 5. Balance Sheet Components

Balance sheet details as of March 31, 2019 and December 31, 2018 are presented in the tables below:



	March 31, 2019		December 31, 2018
	(In thousands)
Inventories:
Raw materials	$	34,552	$	32,511
Work in process	8,876		8,726
Finished goods	60,481		59,631
Total inventories	$	103,909	$	100,868

Other long-term assets:
Capitalized software, net	$	64,682	$	56,819
Unbilled receivables	11,423		16,481
Other assets	1,165		1,313
Total other long-term assets, net	$	77,270	$	74,613

Accrued liabilities:
Operating lease liabilities, current portion	$	10,373	$	—
Advance payments from customers	9,400		8,993
Rebates and lease buyouts	8,111		11,076
Group purchasing organization fees	4,403		4,455
Taxes payable	5,996		5,885
Other accrued liabilities	14,713		12,638
Total accrued liabilities	$	52,996	$	43,047

The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
	2019									2018
	Foreign currency translation adjustments			Unrealized gain (loss) on interest rate swap hedges			Total			Foreign currency translation adjustments			Unrealized gain (loss) on interest rate swap hedges			Total
	(In thousands)
Beginning balance	$	(11,274	)	$	420		$	(10,854	)	$	(6,954	)	$	841		$	(6,113	)
Other comprehensive income before reclassifications	669			100			769			2,472			401			2,873
Amounts reclassified from other comprehensive income (loss), net of tax	—			(417		)	(417		)	—			(199		)	(199		)
Net current-period other comprehensive income (loss), net of tax	669			(317		)	352			2,472			202			2,674
Ending balance	$	(10,605	)	$	103		$	(10,502	)	$	(4,482	)	$	1,043		$	(3,439	)

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Note 6. Property and Equipment

The following table represents the property and equipment balances as of March 31, 2019 and December 31, 2018:



	March 31, 2019			December 31, 2018
	(In thousands)
Equipment	$	76,668		$	75,417
Furniture and fixtures	8,122			7,844
Leasehold improvements	16,381			16,274
Software	42,305			42,048
Construction in progress	11,791			10,706
Property and equipment, gross	155,267			152,289
Accumulated depreciation and amortization	(103,228		)	(100,789		)
Total property and equipment, net	$	52,039		$	51,500

Depreciation expense of property and equipment was $4.0 million and $3.5 million for the three months ended March 31, 2019 and 2018, respectively.

The geographic location of the Company's property and equipment, net, is based on the physical location in which it is located. The following table summarizes the geographic information for property and equipment, net, as of March 31, 2019 and December 31, 2018:



	March 31, 2019		December 31, 2018
	(In thousands)
United States	$	45,656	$	44,684
Rest of world ⁽¹⁾	6,383		6,816
Total property and equipment, net	$	52,039	$	51,500

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⁽¹⁾	No individual country represented more than 10% of the respective totals.

Note 7. Goodwill and Intangible Assets

Goodwill

The following table represents changes in the carrying amount of goodwill:



	December 31, 2018		Additions		Foreign currency exchange rate fluctuations		March 31, 2019
	(In thousands)
Goodwill	$	335,887	$	—	$	232	$	336,119

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Intangible Assets, Net

The carrying amounts and useful lives of intangible assets as of March 31, 2019 and December 31, 2018 were as follows:



	March 31, 2019
	Gross carrying amount ⁽¹⁾		Accumulated amortization			Foreign currency exchange rate fluctuations			Net carrying amount		Useful life (years)
	(In thousands, except for years)
Customer relationships	$	135,234	$	(47,557	)	$	(1,127	)	$	86,550	1 - 30
Acquired technology	77,142		(30,239		)	8			46,911		3 - 20
Backlog	1,150		(575		)	—			575		1 - 4
Trade names	7,650		(4,530		)	11			3,131		1 - 12
Patents	3,239		(1,515		)	2			1,726		2 - 20
Total intangibles assets, net	$	224,415	$	(84,416	)	$	(1,106	)	$	138,893



	December 31, 2018
	Gross carrying amount ⁽¹⁾		Accumulated amortization			Foreign currency exchange rate fluctuations			Net carrying amount		Useful life (years)
	(In thousands, except for years)
Customer relationships	$	135,234	$	(45,029	)	$	(1,185	)	$	89,020	1 - 30
Acquired technology	78,122		(29,206		)	42			48,958		3 - 20
Backlog	21,350		(20,703		)	—			647		1 - 4
Trade names	7,650		(4,361		)	17			3,306		1 - 12
Patents	3,239		(1,488		)	4			1,755		2 - 20
Non-compete agreements	1,900		(1,900		)	—			—		3
Total intangibles assets, net	$	247,495	$	(102,687	)	$	(1,122	)	$	143,686

_________________________________________________


⁽¹⁾	The differences in gross carrying amounts between periods are due to the write-off of fully amortized intangible assets.

Amortization expense of intangible assets was $4.8 million and $6.0 million for the three months ended March 31, 2019 and 2018, respectively.

The estimated future amortization expenses for amortizable intangible assets were as follows:



	March 31, 2019
	(In thousands)
Remaining nine months of 2019	$	13,984
2020	17,618
2021	16,268
2022	14,918
2023	13,768
Thereafter	62,337
Total	$	138,893

Note 8. Debt and Credit Agreements

On January 5, 2016, the Company entered into a $400.0 million senior secured credit facility pursuant to a credit agreement with certain lenders, Wells Fargo Securities, LLC as sole lead arranger, and Wells Fargo Bank, National Association

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as administrative agent (the “Credit Agreement”). The Credit Agreement provides for (a) a five-year revolving credit facility of $200.0 million, which was subsequently increased pursuant to the amendment discussed below (the “Revolving Credit Facility”) and (b) a five-year $200.0 million term loan facility (the “Term Loan Facility” and together with the Revolving Credit Facility, the “Facilities”). In addition, the Credit Agreement includes a letter of credit sub-limit of up to $10.0 million and a swing line loan sub-limit of up to $10.0 million. The Credit Agreement expires on January 5, 2021, upon which date all remaining outstanding borrowings are due and payable.

Loans under the Facilities bear interest, at the Company’s option, at a rate equal to either (a) the LIBOR Rate, plus an applicable margin ranging from 1.50% to 2.25% per annum based on the Company’s consolidated total net leverage ratio (as defined in the Credit Agreement), or (b) an alternate base rate equal to the highest of (i) the prime rate, (ii) the federal funds rate plus 0.50%, and (iii) LIBOR for an interest period of one month, plus an applicable margin ranging from 0.50% to 1.25% per annum based on the Company’s consolidated total net leverage ratio (as defined in the Credit Agreement). Undrawn commitments under the Revolving Credit Facility will be subject to a commitment fee ranging from 0.20% to 0.35% per annum based on the Company’s consolidated total net leverage ratio on the average daily unused portion of the Revolving Credit Facility. A letter of credit participation fee ranging from 1.50% to 2.25% per annum based on the Company’s consolidated total net leverage ratio will accrue on the average daily amount of letter of credit exposure.

The Company is permitted to make voluntary prepayments at any time without payment of a premium or penalty, except for any amounts relating to the LIBOR breakage indemnity described in the Credit Agreement. The Company is required to make mandatory prepayments under the Term Loan Facility with (a) net cash proceeds from any issuances of debt (other than certain permitted debt) and (b) net cash proceeds from certain asset dispositions (other than certain asset dispositions) and insurance and condemnation events (subject to reinvestment rights and certain other exceptions). Loans under the Term Loan Facility will amortize in quarterly installments, equal to 5% per annum of the original principal amount thereof during the first two years, which shall increase to 10% per annum during the third and fourth years, and 15% per annum during the fifth year, with the remaining balance payable on January 5, 2021. The Company is required to make mandatory prepayments under the Revolving Credit Facility if at any time the aggregate outstanding principal amount of loans together with the total amount of outstanding letters of credit exceeds the aggregate commitments, with such mandatory prepayment to be equal to the amount of such excess.

The Credit Agreement contains customary representations and warranties, and customary affirmative and negative covenants applicable to the Company and its subsidiaries, including, among other things, restrictions on indebtedness, liens, investments, mergers, dispositions, dividends, and other distributions. The Credit Agreement contains financial covenants that require the Company and its subsidiaries to not exceed a maximum consolidated total leverage ratio and maintain a minimum fixed charge coverage ratio. The Company’s obligations under the Credit Agreement, and any swap obligations and banking services obligations owing to a lender (or an affiliate of a lender), are guaranteed by certain of its domestic subsidiaries and secured by substantially all of its and the subsidiary guarantors’ assets. In connection with entering into the Credit Agreement, and as a condition precedent to borrowing loans thereunder, the Company and certain of the Company’s other direct and indirect subsidiaries have entered into certain ancillary agreements, including, but not limited to, a collateral agreement and subsidiary guaranty agreement.

On April 11, 2017, the parties entered into the First Amendment to Credit Agreement and Collateral Agreement (the “Amended Credit Agreement”). Under this amendment, (i) the maximum capital expenditures limit in any fiscal year for property, plant, and equipment and software development increased from $35.0 million to $45.0 million, and (ii) the maximum limit for non-permitted investments increased from $10.0 million to $20.0 million.

On December 26, 2017, the parties entered into an amendment (the “Amendment”) to the Amended Credit Agreement. Pursuant to the Amendment, the Revolving Credit Facility provided for under the Amended Credit Agreement, was increased from $200.0 million to $315.0 million, and certain other modifications to the Amended Credit Agreement were made, including amendments to certain negative covenants.

In connection with these Facilities, the Company incurred $10.1 million of debt issuance costs. The debt issuance costs were capitalized and presented as a direct deduction from the carrying amount of that debt liability. The debt issuance costs are being amortized to interest expense using the straight line method from issuance date through 2021. Interest expense (exclusive of fees and issuance cost amortization) was approximately $1.3 million and $1.9 million for the three months ended March 31, 2019 and 2018, respectively. Amortization expense related to fees and issuance cost was approximately $0.6 million for both the three months ended March 31, 2019 and 2018. The Company was in compliance with all covenants as of March 31, 2019 and December 31, 2018.

During the three months ended March 31, 2019, the Company repaid $39.0 million under these Facilities.

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The components of the Company’s debt obligations as of March 31, 2019 and December 31, 2018 were as follows:



	December 31, 2018			Borrowings		Repayment / Amortization			March 31, 2019
	(In thousands)
Term loan facility	$	140,000		$	—	$	(39,000	)	$	101,000
Revolving credit facility	—			—		—			—
Total debt under the facilities	140,000			—		(39,000		)	101,000
Less: Deferred issuance cost	(4,583		)	—		573			(4,010		)
Total long-term debt, net of deferred issuance cost	$	135,417		$	—	$	(38,427	)	$	96,990

As of March 31, 2019, the carrying amount of debt of $101.0 million approximates the comparable fair value of $103.5 million. The Company’s debt facilities are classified as a Level 3 in the fair value hierarchy. The calculation of the fair value is based on a discounted cash flow model using observable market inputs and taking into consideration variables such as interest rate changes, comparable instruments and long-term credit ratings. There have been no significant changes in the assumptions used as of March 31, 2019 as compared to December 31, 2018.

Note 9. Lessor Leases

Sales-Type Leases

On a recurring basis, the Company enters into multi-year, sales-type lease agreements, with the majority varying in length from one to five years. The following table presents the Company’s income recognized from sales-type leases for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
	2019		2018
	(In thousands)
Sales-type lease revenues	$	11,507	$	9,857
Interest income on sales-type lease receivables	$	409	$	267

The receivables as a result of these types of transactions are collateralized by the underlying equipment leased and consist of the following components at March 31, 2019 and December 31, 2018:



	March 31, 2019			December 31, 2018
	(In thousands)
Net minimum lease payments to be received	$	30,806		$	28,295
Less: Unearned interest income portion	(2,348		)	(2,477		)
Net investment in sales-type leases	28,458			25,818
Less: Current portion ⁽¹⁾	(8,989		)	(8,736		)
Long-term net investment in sales-type leases	$	19,469		$	17,082

_________________________________________________


⁽¹⁾	The current portion of the net investment in sales-type leases is included in other current assets in the Condensed Consolidated Balance Sheets.

The carrying amount of the Company’s sales-type lease receivables is a reasonable estimate of fair value, as the unearned interest income is immaterial.

The Company evaluates its sales-type leases individually and collectively for impairment. The allowance for credit losses was $0.2 million as of both March 31, 2019 and December 31, 2018.

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The maturity schedule of future minimum lease payments under sales-type leases retained in-house and the reconciliation to the net investment in sales-type leases reported on the Condensed Consolidated Balance Sheets was as follows:



	March 31, 2019
	(In thousands)
Remaining nine months of 2019	$	8,215
2020	8,016
2021	5,777
2022	5,081
2023	3,097
Thereafter	620
Total future minimum sales-type lease payments	$	30,806
Present value adjustment	(2,348		)
Total net investment in sales-type leases	$	28,458

Operating Leases

The Company entered into certain leasing agreements that were classified as operating leases prior to the adoption of the new lease accounting standard. These agreements in place prior to January 1, 2019 will continue to be treated as operating leases, however any new leasing agreements entered into on or after January 1, 2019 under these programs are classified and accounted for as sales-type leases in accordance with the new lease accounting standard. The operating lease arrangements have initial terms of one to seven years. The following table represents the Company’s income recognized from operating leases for the three months ended March 31, 2019 and 2018:



	Three months ended March 31,
	2019		2018
	(In thousands)
Rental income	$	3,287	$	2,790

The net carrying value of the leased equipment under operating leases was $2.5 million and $2.6 million, which includes accumulated depreciation of $1.3 million and $1.2 million, as of March 31, 2019 and December 31, 2018, respectively. Depreciation of the leased equipment was $0.1 million for both the three months ended March 31, 2019 and 2018.

The maturity schedule of future minimum lease payments under operating leases was as follows:



	March 31, 2019
	(In thousands)
Remaining nine months of 2019	9,124
2020	9,349
2021	7,244
2022	5,205
2023	3,026
Thereafter	1,248
Total future minimum operating lease payments	$	35,196

Note 10. Lessee Leases

The Company has operating leases for office buildings, data centers, office equipment, and vehicles. The Company’s leases have initial terms of one to 12 years. As of March 31, 2019, the Company did not have any additional operating leases that were entered into, but not yet commenced.

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The maturity schedule of future minimum lease payments under operating leases and the reconciliation to the operating lease liabilities reported on the Condensed Consolidated Balance Sheets was as follows:



	March 31, 2019
	(In thousands)
Remaining nine months of 2019	$	10,737
2020	13,328
2021	12,831
2022	11,799
2023	8,415
Thereafter	27,832
Total operating lease payments	$	84,942
Present value adjustment	(17,099		)
Total operating lease liabilities ⁽¹⁾	$	67,843

_________________________________________________


⁽¹⁾	Amount consists of a current and long-term portion of operating lease liabilities of $10.4 million and $57.5 million, respectively. The short-term portion of the operating lease liabilities is included in accrued liabilities in the Condensed Consolidated Balance Sheets.

Prior to the adoption of the new lease accounting standard, the maturity schedule of future minimum lease payments under operating leases was as follows:



	December 31, 2018
	(In thousands)
2019	$	14,153
2020	13,104
2021	12,729
2022	11,809
2023	8,334
Thereafter	27,289
Total minimum future lease payments	$	87,418

Operating lease costs were $3.7 million for the three months ended March 31, 2019. Short-term lease costs and variable lease costs were immaterial for the three months ended March 31, 2019.

The following table summarizes other information related to the Company’s operating leases for the three months ended March 31, 2019:



	Three months ended March 31, 2019
	(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities	$	3,761
Right-of-use assets obtained in exchange for new lease liabilities	431

Weighted-average remaining lease term, years	7.0
Weighted-average discount rate, %	6.4		%

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Note 11. Commitments and Contingencies

Purchase Obligations

In the ordinary course of business, the Company issues purchase orders based on its current manufacturing needs. As of March 31, 2019, the Company had non-cancelable purchase commitments of $71.0 million, of which $65.5 million are expected to be paid within the year ended December 31, 2019.

Legal Proceedings

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

On January 10, 2018, a lawsuit was filed against a number of individuals, governmental agencies, and corporate entities, including the Company and one of its subsidiaries, Aesynt Incorporated (“Aesynt”), in the Circuit Court for the City of Richmond, Virginia, captioned Ruth Ann Warner, as Guardian of Jonathan James Brewster Warner v. Centra Health, Inc., et al., Case No. CL18-152-1. The complaint seeks monetary recovery of compensatory and punitive damages in addition to certain declaratory relief based upon, as against the individuals, governmental agencies, and corporate entities other than the Company and Aesynt, allegations of the use of excessive force, unlawful detention, false imprisonment, battery, simple and gross negligence and negligent hiring, detention, and training; and, as against the Company and Aesynt, claims of product liability, negligence, and breach of implied warranties. The Company and Aesynt have not yet been served with the complaint. The Company intends to defend the lawsuit vigorously.

On June 6, 2018, a class-action lawsuit was filed against a customer of the Company, the customer’s parent company and two vendors of medication dispensing systems, one of which is the Company, in the Circuit Court of Cook County, Illinois, Chancery Division, captioned Yana Mazya, individually and on behalf of all others similarly situated v. Northwestern Lake Forest Hospital, Northwestern Memorial Healthcare, Omnicell, Inc. and Becton Dickinson, Case No. 2018-CH-07161. The complaint sought class certification, monetary damages in the form of statutory damages for willful and/or reckless or, in the alternative, negligent violation of the Illinois Biometric Information Privacy Act (“BIPA”), and certain declaratory, injunctive, and other relief based on causes of action directed to allegations of violation of BIPA and of negligence by the defendants. The complaint was served on the Company on June 15, 2018. The Company’s obligation to respond to the complaint was held in abeyance pending a decision of the Illinois Supreme Court in a separate case involving BIPA issues. The Illinois Supreme Court issued its decision in that case on January 25, 2019. On April 10, 2019, subsequent to the court’s issuance of an order granting the plaintiff leave to file an amended complaint, the plaintiff filed an amended complaint adding a second named plaintiff and an affiliate of the Company’s customer as an additional defendant and, in addition to making other modifications to the complaint, removing the separate cause of action directed to negligence. The court established a deadline of May 13, 2019 for the defendants to answer or otherwise respond to the amended complaint. The Company intends to defend the lawsuit vigorously.

A declaratory judgment action was filed against the Company, on August 30, 2018, in the United States District Court for the Northern District of California, captioned Zurich American Insurance Company; American Guarantee & Liability Company v. Omnicell, Inc. and Does 1-10, inclusive, Case No. 3:18-CV-05345. The complaint seeks a declaration that the plaintiffs have no duty to defend or indemnify the Company in connection with the underlying litigation, the Yana Mazya, et al. v. Northwestern Lake Forest Hospital, et al., Case No. 2018-CH-07161 pending in the Circuit Court of Cook County, Illinois, Chancery Division (“Underlying Action”), disclosed above, together with claims for reimbursement and unjust enrichment relating to the defense of the Underlying Action in the form of attorneys’ fees and other related costs. The Company has not responded to the complaint. On February 12, 2019, the court stayed the action pending the outcome of the Underlying Action and administratively closed the case. The Company intends to defend the lawsuit vigorously.

Note 12. Income Taxes

The Company generally provides for income taxes in interim periods 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 23.3% and 18.3% for the three months ended March 31, 2019 and 2018, respectively.

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As a result of global operational centralization activities during the three months ended March 31, 2018, the Company recognized $4.2 million of a discrete tax benefit associated with making a check-the-box election to treat Aesynt Coöperatief U.A. (Netherlands) as a US disregarded entity for the three months ended March 31, 2018. Due to continuing global operational centralization activities during the three months ended March 31, 2019, the Company recognized gain on the sale of certain intellectual property rights by Aesynt Coöperatief U.A. to Omnicell, Inc., which resulted in a discrete tax expense in the amount of $9.6 million during the three months ended March 31, 2019. The Company also recognized a discrete benefit related to equity compensation in the amount of $4.6 million and $0.9 million for the three months ended March 31, 2019 and March 31, 2018 respectively.

The 2019 annual effective tax rate differed from the statutory rate of 21% primarily due to the unfavorable impact of the state income taxes, non-deductible equity charges, and non-deductible expenses, partially offset by the favorable impact of the research and development credits, foreign rate differential, and foreign derived intangible income (“FDII”) benefit deduction. The 2018 annual effective tax rate differed from the statutory rate of 21% primarily due to the favorable impact of the research and development credits and foreign rate differential, which were partially offset by the unfavorable impact of state income taxes, non-deductible expenses, and non-deductible equity charges.

As of March 31, 2019 and December 31, 2018, the Company had gross unrecognized tax benefits of $14.3 million and $10.0 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 other income/expense in the consolidated statements of operations. As of March 31, 2019 and December 31, 2018, the amount of accrued interest and penalties was $1.5 million and $1.4 million, respectively.

The Company files income tax returns in the United States and various states and foreign jurisdictions. In the normal course of business, the Company is subject to examination by taxing authorities, including major jurisdictions such as the United States, Germany, Italy, Netherlands, and the United Kingdom. With few exceptions, as of March 31, 2019, the Company is no longer subject to U.S., state, and foreign examination for years before 2015, 2014, and 2014, respectively.

Although the Company believes it has adequately provided for uncertain tax positions, the provisions on these positions may change as revised estimates are made or the underlying matters are settled or otherwise resolved. It is not possible at this time to reasonably estimate changes in the unrecognized tax benefits within the next twelve months.

Note 13. Employee Benefits and Share-Based Compensation

Stock-Based Plans

For a detailed explanation of the Company's stock plans, please refer to Note 11, Employee Benefits and Share-Based Compensation, of the Company's annual report on Form 10-K for the year ended December 31, 2018 filed with the SEC on February 27, 2019.

Share-Based Compensation Expense

The following table sets forth the total share-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018:



	Three months ended
	March 31, 2019		March 31, 2018
	(In thousands)
Cost of product and service revenues	$	1,462	$	1,019
Research and development	1,702		1,234
Selling, general, and administrative	5,246		4,275
Total share-based compensation expense	$	8,410	$	6,528

In the first quarter of 2019, the Company modified the terms of its stock options by extending the post-employment exercise period for certain employees. The Company recorded share-based compensation expense related to this option modification of approximately $0.2 million during the three months ended March 31, 2019. The Company will incur an additional $0.8 million of share-based compensation expense for the impacted options over the remaining weighted-average vesting periods of 1.9 years.

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Stock Options and ESPP Shares

The following assumptions were used to value stock options and Employee Stock Purchase Plan (“ESPP”) shares granted pursuant to the Company’s equity incentive plans for the three months ended March 31, 2019 and 2018:



	Three months ended
	March 31, 2019		March 31, 2018
Stock options
Expected life, years	4.5		4.8
Expected volatility, %	33.1	%	32.2	%
Risk-free interest rate, %	2.6	%	2.6	%
Estimated forfeiture rate, %	7.2	%	6.9	%
Dividend yield, %	—	%	—	%



	Three months ended
	March 31, 2019		March 31, 2018
Employee stock purchase plan shares
Expected life, years	0.5 - 2.0		0.5 - 2.0
Expected volatility, %	28.2% - 38.4%		27.7% - 33.8%
Risk-free interest rate, %	1.3% - 2.7%		0.7% - 2.3%
Dividend yield, %	—	%	—	%

Stock Options Activity

The following table summarizes the share option activity under the Company’s equity incentive plans during the three months ended March 31, 2019:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Years	Aggregate Intrinsic Value
	(In thousands, except per share data)
Outstanding at December 31, 2018	3,748		$	41.27	7.6	$	78,365
Granted	292		76.18
Exercised	(379	)	31.83
Expired	—		—
Forfeited	(117	)	44.18
Outstanding at March 31, 2019	3,544		$	45.06	7.9	$	127,007
Exercisable at March 31, 2019	1,275		$	31.24	6.3	$	63,241
Vested and expected to vest at March 31, 2019 and thereafter	3,544		$	45.06	7.9	$	127,007

The weighted-average fair value per share of options granted during the three months ended March 31, 2019 and 2018 was $24.07 and $14.22, respectively. The intrinsic value of options exercised during the three months ended March 31, 2019 and 2018 was $17.1 million and $2.0 million, respectively.

As of March 31, 2019, total unrecognized compensation cost related to unvested stock options was $32.5 million, which is expected to be recognized over a weighted-average vesting period of 2.9 years.

Employee Stock Purchase Plan Activity

For the three months ended March 31, 2019 and 2018, employees purchased approximately 210,000 and 289,000 shares of common stock, respectively, under the ESPP at weighted average prices of $40.20 and $26.30, respectively. As of March 31, 2019, the unrecognized compensation cost related to the shares to be purchased under the ESPP was approximately $3.9 million and is expected to be recognized over a weighted-average period of 1.5 years.

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Restricted Stock Units (“RSUs”) and Restricted Stock Awards (“RSAs”)

Summaries of the restricted stock activity under the Company’s 2009 Equity Incentive Plan, as amended (the “2009 Plan”) are presented below for the three months ended March 31, 2019:



	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
Outstanding at December 31, 2018	538		$	51.52	1.6	$	32,935
Granted (Awarded)	30		78.23
Vested (Released)	(36	)	39.78
Forfeited	(27	)	44.87
Outstanding and unvested at March 31, 2019	505		$	54.32	1.5	$	40,813

As of March 31, 2019, total unrecognized compensation cost related to RSUs was $23.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.7 years.



	Number of Shares	Weighted-Average Grant Date Fair Value
	(In thousands, except per share data)
Restricted stock awards
Outstanding at December 31, 2018	21	$	46.60
Granted (Awarded)	—	—
Vested (Released)	—	—
Forfeited	—	—
Outstanding and unvested at March 31, 2019	21	$	46.60

As of March 31, 2019, total unrecognized compensation cost related to RSAs was $0.1 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.1 years.

Performance-Based Restricted Stock Units

A summary of the performance-based restricted stock activity under the 2009 Plan is presented below for the three months ended March 31, 2019:



	Number of Shares		Weighted-Average Grant Date Fair Value Per Unit
	(In thousands, except per share data)
Outstanding at December 31, 2018	197		$	34.83
Granted	61		72.02
Vested	(26	)	38.03
Forfeited	(20	)	34.37
Outstanding and unvested at March 31, 2019	212		$	45.18

As of March 31, 2019, total unrecognized compensation cost related to PSUs was approximately $5.3 million, which is expected to be recognized over the remaining weighted-average period of 1.3 years.

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Summary of Shares Reserved for Future Issuance under Equity Incentive Plans

The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of March 31, 2019:



	Number of Shares
	(In thousands)
Share options outstanding	3,544
Non-vested restricted share awards	738
Shares authorized for future issuance	2,140
ESPP shares available for future issuance	1,703
Total shares reserved for future issuance	8,125

Stock Repurchase Program

On August 2, 2016, the Company's Board of Directors (the “Board”) authorized a stock repurchase program providing for the repurchase of up to $50.0 million of the Company’s common stock (the “2016 Repurchase Program”). The 2016 Repurchase Program is in addition to the stock repurchase program approved by the Board on November 4, 2014 (the “2014 Repurchase Program”). As of March 31, 2019, the maximum dollar value of shares that may yet be purchased under the two repurchase programs was $54.9 million. The stock repurchase programs do not obligate the Company to repurchase any specific number of shares, and the Company may terminate or suspend the repurchase programs at any time.

During the three months ended March 31, 2019 and 2018, the Company did not repurchase any of its outstanding common stock.

Note 14. Equity Offerings

On November 3, 2017, the Company entered into a Distribution Agreement (the “Distribution Agreement”) with J.P. Morgan Securities LLC, Wells Fargo Securities, LLC, and HSBC Securities (USA) Inc., as its sales agents, pursuant to which the Company may offer and sell from time to time through the sales agents up to $125.0 million maximum aggregate offering price of the Company’s common stock. Sales of the common stock pursuant to the Distribution Agreement may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the Nasdaq Stock Market, or sales made to or through a market maker other than on an exchange.

For the three months ended March 31, 2019, the Company received gross proceeds of $20.6 million from sales of its common stock under the Distribution Agreement and incurred issuance costs of $0.4 million on sales of approximately 243,000 shares of its common stock at an average price of approximately $84.98 per share. For the three months ended March 31, 2018, the Company did not sell any of its common stock under the Distribution Agreement.

As of March 31, 2019, the Company had an aggregate of $49.4 million available to be offered under the Distribution Agreement.

Note 15. Restructuring Expenses

In the fourth quarter of 2018, the Company announced a company-wide organizational realignment initiative in order to align its organizational infrastructure for future expected growth. During the year ended December 31, 2018, the Company incurred and accrued for $1.3 million of restructuring expenses, which includes severance and consulting-related expenses. As of March 31, 2019, the unpaid balance related to this restructuring plan was $0.1 million.

On March 2, 2018, the Company initiated the realignment of its Automation and Analytics commercial group in North America and France. During the three months ended March 31, 2018, the Company accrued $1.4 million of employee severance cost and related expenses. As of December 31, 2018, there was no unpaid balance related to this restructuring program.

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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.” Forward-looking statements include, but are not limited to, statements about:


•	our expectations regarding our future pipeline and product bookings;


•	the extent and timing of future revenues, including the amounts of our current backlog;


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


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


•	our continued investment in, and ability to deliver on, our key business strategies of developing differentiated solutions, increasing penetration of new markets, and expanding our solutions through acquisitions and partnerships, as well as our goal of advancing our platform with new product introductions annually;


•	our ability to deliver on our vision of the Autonomous Pharmacy and lead a transformation management through this vision, as well as our plans to integrate our current offerings and technologies on cloud infrastructure and invest in certain key areas as we execute on this vision;


•	continued investment in our vision of the Autonomous Pharmacy, our beliefs about the anticipated benefits of such investments, and our expectations regarding continued growth in subscription and cloud-based offerings as we execute on this vision;


•	our belief that continued investment in our key business strategies will continue to generate our revenue and earnings growth while supporting our customers’ initiatives and needs;


•	our belief that our solutions and our vision for the future of medication management automation are strongly aligned with long-term trends in the healthcare market and well-positioned to address the evolving needs of the healthcare institutions;


•	the bookings, revenue, and margin 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 expected future uses of cash and the sufficiency of our sources of funding;


•	the expected impacts of new accounting standards or changes to existing accounting standards; and


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

In some cases, you can identify forward-looking statements by terms such as "anticipates," "believes," "could," "estimates," "expects," "intends," "seeks," "may," "plans," "potential," "predicts," "projects," "should," "will," "would" and variations of these terms and similar expressions. Forward-looking statements are based on our current expectations and assumptions and are subject to known and unknown risks and uncertainties, which may cause our actual results, performance, or achievements to be materially different from those expressed or implied in the forward-looking statements.

Such risks and uncertainties include those described throughout this quarterly report, particularly in Part II - Item 1A. “Risk Factors” below. Given these risks and uncertainties, you should not place undue reliance on these forward-looking statements. You should carefully read this quarterly report and the documents that we reference in this quarterly report and have filed as exhibits, as well as other documents we file from time to time with the Securities and Exchange Commission, 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

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subsidiaries. The term "Omnicell, Inc.," refers only to Omnicell, Inc., excluding its subsidiaries. The forward-looking statements in this quarterly report represent our estimates and assumptions only as of the date of this quarterly report. 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 expressed or implied in any forward-looking statements, even if new information becomes available in the future.

We own various trademarks and service marks used in our business, including the following registered and unregistered marks which appear in this report: Omnicell®, the Omnicell logo, Ateb^®, InPharmics^®, Aesynt^®, and Performance Center^TM. This report also includes the trademarks and service marks of other companies. All other trademarks and service marks used in this report are the marks of their respective holders.

OVERVIEW

Our Business

We are a leading provider of medication and supply dispensing automation, central pharmacy automation, analytics software, and medication adherence solutions. As we build on our vision of the Autonomous Pharmacy - a more fully automated and digitized system of medication management - we believe we will further help enable healthcare providers to improve patient safety, increase efficiency, lower costs, tighten regulatory compliance, and address population health challenges.

Over 5,500 facilities worldwide use our automation and analytics solutions to help increase operational efficiency, reduce medication errors, deliver actionable intelligence, and improve patient safety. More than 40,000 institutional and retail pharmacies across North America and the United Kingdom leverage our innovative medication adherence solutions designed to improve patient engagement and adherence to prescriptions, helping to reduce costly hospital readmissions.

We sell our product and consumable solutions together with related service offerings. Revenues generated in the United States represented 89% and 87% of our total revenues for the three months ended March 31, 2019 and 2018, respectively. We have not in the past sold, 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, or those subject to economic sanctions and export controls.

Operating Segments

Our Chief Operating Decision Maker ("CODM") is our Chief Executive Officer. The CODM allocates resources and evaluates Omnicell’s performance using information about our revenues, gross profit, income from operations, and other key financial data. We previously operated and reported our business in two segments: Automation and Analytics, and Medication Adherence. In the fourth quarter of 2018, we introduced our vision of the Autonomous Pharmacy in order to address changes in the healthcare industry as we execute on our plan to deliver end-to-end solutions with a greater emphasis on automating manual processes for our customers. These industry changes include the continuing consolidation of healthcare systems, rising pharmaceutical costs, and increased scrutiny on controlled substances. In an effort to deliver on our strategic vision, we initiated a company-wide organizational realignment in the fourth quarter of 2018 to centrally manage our business operations, including the development and marketing of all of our products, sales and distribution, supply chain and inventory management, as well as regulatory and quality functions. As a result of this organizational realignment, all significant operating decisions are based upon an analysis of Omnicell as one operating segment. Therefore, effective January 1, 2019, we started reporting as only one operating segment, which is the same as the reporting segment. Accordingly, prior period information has been revised to conform with current period presentation.

Strategy

The healthcare market is experiencing a period of substantive change. In recent years, healthcare providers and facilities have faced increased spending on medication management, rising pharmaceutical costs, and substantial increases in healthcare administration. These factors, combined with continuing consolidation in the healthcare industry, have increased the need for the efficient delivery of healthcare in order to control costs and improve patient safety, and have elevated the strategic importance of medication management across the continuum of care. Furthermore, the adoption of electronic healthcare records, new regulatory constraints, and changes in reimbursement arrangements have caused healthcare institutions to re-examine their operating structures, re-prioritize their investments, and seek efficiencies. We believe the evolving operating environments of our customers create challenges for any supplier, but also afford opportunities for suppliers that are able to partner with customers to help them meet the changing demands. We have invested, and intend to continue to invest in the strategies that we believe have generated, and will continue to generate, our revenue and earnings growth, while supporting initiatives and needs of our customers. These strategies include:

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•

Development of a differentiated platform. We intend to continue our focus on further penetrating existing markets through technological leadership and our differentiated platform by consistently innovating our product and service offerings and maintaining our customer-oriented product installation process. We have developed numerous technologies that solve significant challenges for our customers. For example, our XR2 Automated Central Pharmacy System is designed to allow pharmacies to more fully automate medication dispensing, and help to reduce labor cost, decrease medication waste, and improve patient safety; our IVX Workflow solution is designed to reduce medication compounding errors compared to manual compounding methods; and our Performance Center offering leverages predictive analytics to help pharmacies be more proactive in addressing drug shortages.

•

Delivery of our solutions to new markets. We seek to increase penetration of new markets, such as non-acute care and international markets by: launching new products and technologies that are specific to the needs of those markets; building and establishing direct sales, distribution or other capabilities when and where it is appropriate; partnering with companies that have sales, distribution, or other capabilities that we do not possess; and increasing customer awareness of safety issues in the administration of medications. Consistent with this strategy, we have made investments in expanding our sales team and marketing to new customers. Our international efforts have focused primarily on two markets: Western Europe and the Middle East. We have also expanded our sales efforts to medication adherence customers in the United States.

•

Expansion of our solutions through acquisitions and partnerships. We believe that expansion of our product lines through acquisitions and partnerships to meet our customers’ changing and evolving expectations is a key component to our historical and future success. Building on the successful acquisitions of the past few years, we intend to continue to explore acquisition and partnership opportunities that are a strategic fit for our business, including in support of our Autonomous Pharmacy vision. 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.

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 generally by a non-cancelable contract and purchase order for equipment and software, and by a purchase order for consumables. Equipment and software bookings are generally installable within twelve months and, other than sales based on subscription services, 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. We provide installation planning and consulting as part of every product sale which is included in the initial price of the solution. To help assure the maximum availability of our systems, our customers typically purchase maintenance and support contracts in increments of one to five years. As a result of the growth of our installed base of customers, our service revenues have also grown.

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 outcomes for healthcare providers and patients. We expect our investment in differentiated products, new markets, and acquisitions and partnerships to continue.

Our full-time headcount was approximately 2,470 and 2,480 on March 31, 2019 and December 31, 2018, respectively.

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 United States Generally Accepted Accounting Principles (“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;

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•	Allowance for doubtful accounts and notes receivable from investment in sales-type leases;


•	Leases;


•	Inventory;


•	Software development costs;


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


•	Share-based compensation; and


•	Accounting for income taxes.

There were 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 months ended March 31, 2019 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, 2018, except as discussed in “Recently Adopted Authoritative Guidance” in Note 1, Organization and Summary of Significant Accounting Policies, of the Notes to Condensed Consolidated Financial Statements included in this quarterly report.

Recently Issued Authoritative Guidance

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

RESULTS OF OPERATIONS

Total Revenues



	Three months ended March 31,
					Change in
	2019		2018		$		%
	(Dollars in thousands)
Product revenues	$	145,610	$	130,659	$	14,951	11%
Percentage of total revenues	72%		72%
Services and other revenues	56,907		51,960		4,947		10%
Percentage of total revenues	28%		28%
Total revenues	$	202,517	$	182,619	$	19,898	11%

Product revenues represented 72% of total revenues for both the three months ended March 31, 2019 and 2018. Product revenues increased by $15.0 million primarily due to an increase of $12.8 million in our Automated Dispensing Cabinet business driven primarily by the growth of XT series products, as well as increases in revenues from consumables and other product mixes.

Services and other revenues represented 28% of total revenues for both the three months ended March 31, 2019 and 2018. Services and other revenues include revenues from service and maintenance contracts, and rentals of automation systems. Services and other revenues increased by $4.9 million, primarily due to higher service renewal fees driven mainly by an increase in our installed customer base.

Our international sales represented 11% and 13% of total revenues for the three months ended March 31, 2019 and 2018, respectively, and are expected to be affected by foreign currency exchange rate fluctuations. We are unable to predict the extent to which revenues in future periods will be impacted by changes in foreign currency exchange rates.

Our ability to continue to grow revenue is dependent on our ability to continue to obtain orders from customers, our ability to produce quality products and 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.

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 March 31,
					Change in
	2019		2018		$		%
	(Dollars in thousands)
Cost of revenues:
Cost of product revenues	$	78,811	$	75,417	$	3,394	5%
As a percentage of related revenues	54%		58%
Cost of services and other revenues	26,589		24,747		1,842		7%
As a percentage of related revenues	47%		48%
Total cost of revenues	$	105,400	$	100,164	$	5,236	5%
As a percentage of total revenues	52%		55%

Gross profit	$	97,117	$	82,455	$	14,662	18%
Gross margin	48%		45%

Cost of revenues for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 increased by $5.2 million, of which $3.4 million was attributed to the increase in cost of product revenues and $1.8 million was attributed to the increase in cost of services and other revenues. The increase in cost of product revenues is consistent with the increase in product revenues of $15.0 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase in cost of services and other revenues is consistent with the increase in cost of services and other revenues of $4.9 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

The overall increase in gross margin primarily relates to lower costs associated with the XT series manufacturing ramp up, economies of scale, and stabilized service costs. Our gross profit for the three months ended March 31, 2019 was $97.1 million as compared to $82.5 million for the three months ended March 31, 2018.

Operating Expenses, Income from Operations, and Interest and Other Income (Expense), Net



	Three months ended March 31,
							Change in
	2019			2018			$			%
	(Dollars in thousands)
Operating expenses:
Research and development	$	16,078		$	16,537		$	(459	)	(3)%
As a percentage of total revenues	8%			9%
Selling, general, and administrative	68,278			65,285			2,993			5%
As a percentage of total revenues	34%			36%
Total operating expenses	$	84,356		$	81,822		$	2,534		3%
As a percentage of total revenues	42%			45%

Income from operations	$	12,761		$	633		$	12,128		1,916%
Operating margin	6%			—%

Interest and other income (expense), net	$	(1,410	)	$	(2,729	)	$	1,319		(48)%

Research and Development. Research and development expenses decreased by $0.5 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The decrease was primarily attributed to several research and development projects reaching capitalization stage during the three months ended March 31, 2019, as we are allocating additional resources to software projects, resulting in lower research and development expenses. The decrease in research and development expenses was partially offset by increased spend on consulting expenses, as well as a higher headcount in the research and development function.

Selling, General, and Administrative. Selling, general, and administrative expenses increased by $3.0 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily due to growth of operations and primarily attributed to higher consulting and employee-related expenses.

Interest and Other Income (Expense), Net. Interest and other income (expense), net decreased by $1.3 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, primarily driven by lower interest expense due to significant debt repayments during the year ended December 31, 2018 and three months ended March 31, 2019, as well as favorable foreign currency fluctuations during the period.

Provision for (Benefit from) Income Taxes



	Three months ended March 31,
						Change in
	2019		2018			$		%
	(Dollars in thousands)
Provision for (benefit from) income taxes	$	8,067	$	(4,816	)	$	12,883	(268)%

Effective Tax Rate On Earnings. Our annual effective tax rate before discrete items was 23.3% and 18.3% for the three months ended March 31, 2019 and 2018, respectively. The decrease in the estimated annual effective tax rate for the three months ended March 31, 2019 compared to the same period in 2018 was primarily due to state income taxes and non-deductible equity charges.

LIQUIDITY AND CAPITAL RESOURCES

We had cash and cash equivalents of $77.2 million at March 31, 2019 compared to $67.2 million at December 31, 2018. All of our cash and cash equivalents are invested in bank accounts with major financial institutions.

Our cash position and working capital at March 31, 2019 and December 31, 2018 were as follows:



	March 31, 2019		December 31, 2018
	(In thousands)
Cash	$	77,244	$	67,192
Working capital	$	203,085	$	192,554

Our ratio of current assets to current liabilities was 2.0:1 at March 31, 2019 and 1.9:1 at December 31, 2018.

Sources of Cash

Credit Agreement

On January 5, 2016, we entered into a $400.0 million secured credit facility pursuant to a credit agreement with certain lenders, Wells Fargo Securities, LLC as sole lead arranger, and Wells Fargo Bank, National Association as administrative agent (the “Credit Agreement”). The Credit Agreement provides for a $200.0 million term loan facility (the “Term Loan Facility”), and prior to the amendment discussed below, a $200.0 million revolving credit facility (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Facilities”). In addition, the Credit Agreement includes a letter of credit sub-limit of up to $10.0 million and a swing line loan sub-limit of up to $10.0 million.

On December 26, 2017 and April 11, 2017, we entered into amendments to the Credit Agreement. Under these amendments, the Revolving Credit Facility was increased from $200.0 million to $315.0 million and certain other modifications were made. Refer to Note 8, Debt and Credit Agreements, of the Notes to Condensed Consolidated Financial Statements included in this quarterly report. We expect to use future loans under the Revolving Credit Facility, if any, for general corporate purposes, including acquisitions.

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As of March 31, 2019, the outstanding balance from the Facilities was $101.0 million and we were in compliance with all covenants.

Distribution Agreement

On November 3, 2017, we entered into a Distribution Agreement (the “Distribution Agreement”) with J.P. Morgan Securities LLC, Wells Fargo Securities, LLC and HSBC Securities (USA) Inc., as our sales agents, pursuant to which we may offer and sell from time to time through the sales agents up to $125.0 million maximum aggregate offering price of our common stock. Sales of the common stock pursuant to the Distribution Agreement may be made in negotiated transactions or transactions that are deemed to be “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, including sales made directly on the Nasdaq Stock Market, or sales made to or through a market maker other than on an exchange. We intend to use the net proceeds from the sale, if any, of common stock in the offering for general corporate purposes, which may include, without limitation, the acquisition of complementary businesses, the repayment of outstanding indebtedness, capital expenditures and working capital.

For the three months ended March 31, 2019, we received gross proceeds of $20.6 million from sales of our common stock under the Distribution Agreement and incurred issuance costs of $0.4 million on sales of approximately 243,000 shares of our common stock at an average price of approximately $84.98 per share. For the three months ended March 31, 2018, we did not sell any of our common stock under the Distribution Agreement.

As of March 31, 2019, we had an aggregate of $49.4 million available to be offered under the Distribution Agreement.

Uses of Cash

Our future uses of cash are expected to be primarily for working capital, capital expenditures, loan principal and interest payments, and other contractual obligations. We also expect a continued use of cash for potential acquisitions and acquisition-related activities.

Our stock repurchase programs have a total of $54.9 million remaining for future repurchases as of March 31, 2019, which may result in additional use of cash. See “Stock Repurchase Program” under Note 13, Employee Benefits and Share-Based Compensation, of the Notes to Condensed Consolidated Financial Statements included in this quarterly report. There were no stock repurchases during the three months ended March 31, 2019 and 2018.

Based on our current business plan and revenue backlog, we believe that our existing cash and cash equivalents, our anticipated cash flows from operations, cash generated from the exercise of employee stock options and purchases under our employee stock purchase plan, along with the availability of funds under the Facilities will be sufficient to meet our cash needs for working capital, capital expenditures, potential acquisitions, and other contractual obligations for at least the next twelve months. For periods beyond the next twelve months, we also anticipate that our net operating cash flows plus existing balances of cash and cash equivalents will suffice to fund the continued growth of our business.

Cash Flows

The following table summarizes, for the periods indicated, selected items in our Condensed Consolidated Statements of Cash Flows:



	Three months ended
	March 31, 2019			March 31, 2018
	(In thousands)
Net cash provided by (used in):
Operating activities	$	26,497		$	18,856
Investing activities	(16,697		)	(14,540		)
Financing activities	(178		)	5,741
Effect of exchange rate changes on cash and cash equivalents	430			1,292
Net increase in cash and cash equivalents	$	10,052		$	11,349

Operating Activities

We expect cash from our operating activities to fluctuate in future periods as a result of a number of factors, including the timing of our billings and collections, our operating results, and the timing of other liability payments.

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Net cash provided by operating activities was $26.5 million for the three months ended March 31, 2019, primarily consisting of net income of $3.3 million adjusted for non-cash items of $27.7 million offset by changes in assets and liabilities of $4.5 million. The non-cash items primarily consisted of depreciation and amortization expense of $12.6 million, share-based compensation expense of $8.4 million, amortization of operating lease right-of-use asset amortization of $2.6 million, debt financing fees of $0.6 million, and a decrease in deferred income taxes of $3.1 million. Changes in assets and liabilities include cash outflows from (i) a decrease in accrued compensation of $12.6 million primarily due to a decrease in accrued commissions, as well as timing of payroll and ESPP purchases, (ii) an increase in accounts receivable and unbilled receivables of $7.3 million due to an increase in billings, (iii) an increase in inventories of $2.9 million for inventory buildup in support of forecasted sales, (iv) a decrease in operating lease liabilities of $2.7 million, and (v) an increase in investments in sales-type leases of $2.6 million. These cash outflows were partially offset by (i) an increase in deferred revenues of $8.0 million due to timing of orders and revenues being recognized for installed product, (ii) a decrease in other long-term assets of $5.2 million, (iii) an increase in other long-term liabilities of $4.1 million, (iv) a decrease in prepaid expenses of $3.7 million, and (v) a decrease in prepaid commissions of $2.5 million.

Net cash provided by operating activities was $18.9 million for the three months ended March 31, 2018, primarily consisting of net income of $2.7 million adjusted for non-cash items of $14.3 million and changes in assets and liabilities of $1.9 million. The non-cash items primarily consisted of depreciation and amortization expense of $12.3 million, share-based compensation expense of $6.5 million, amortization of debt financing fees of $0.6 million, and an increase in deferred income taxes of $5.1 million. Changes in assets and liabilities include cash inflows from (i) an increase in deferred revenues of $15.1 million due to timing of orders and revenues being recognized for installed product, (ii) an increase in accrued liabilities of $4.3 million, (iii) an increase in accrued compensation of $2.4 million, and (iv) a decrease in prepaid commissions of $1.8 million. These cash inflows were partially offset by (i) a decrease in accounts payable of $9.4 million primarily due to the timing of payments, (ii) an increase in inventories of $6.9 million due to inventory buildup in support of forecasted sales, (iii) an increase in other long-term assets of $1.7 million, (iv) an increase in investment in sales-type leases of $1.5 million, and (v) an increase in other current assets of $1.0 million.

Investing Activities

Net cash used in investing activities was $16.7 million for the three months ended March 31, 2019, which consisted of capital expenditures of $5.0 million for property and equipment, and $11.7 million for costs of software development for external use.

Net cash used in investing activities was $14.5 million for the three months ended March 31, 2018, which consisted of capital expenditures $9.3 million for property and equipment and $5.3 million for costs of software development for external use.

Financing Activities

Net cash used in financing activities was $0.2 million for the three months ended March 31, 2019, primarily due to the repayment of $39.0 million of the Facilities and $1.9 million in employees’ taxes paid related to restricted stock unit vesting, partially offset by $20.5 million in proceeds from employee stock option exercises and employee stock plan purchases, and $20.2 million proceeds from sales of our common stock under the Distribution Agreement.

Net cash provided by financing activities was $5.7 million for the three months ended March 31, 2018, primarily from the $9.5 million in proceeds from employee stock option exercises and employee stock plan purchases, partially offset by the repayment of $2.5 million of the Facilities and $1.3 million in employees’ taxes paid related to restricted stock unit vesting.

Contractual Obligations

There have been no significant changes during the three months ended March 31, 2019 to the contractual obligations disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations, set forth in Part II, Item 7, of our annual report on Form 10-K for the year ended December 31, 2018.

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Contractual obligations as of March 31, 2019 were as follows:



	Payments due by period
	Total		Remainder of 2019		2020 - 2021		2022 - 2023		2024 and thereafter
	(In thousands)
Operating leases ⁽¹⁾	$	84,942	$	10,737	$	26,159	$	20,214	$	27,832
Purchase obligations ⁽²⁾	70,970		65,456		5,021