QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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
As of October 26, 2018, there were 39,626,231 shares of the registrant’s common stock, $0.001 par value, outstanding.
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 automated medication, supply control systems 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 September 30, 2018 and December 31, 2017, the results of operations and comprehensive income for the three and nine months ended September 30, 2018 and September 30, 2017, and cash flows for the nine months ended September 30, 2018 and September 30, 2017. 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, 2017 filed with the SEC on February 27, 2018, except as discussed in the section entitled “Revenue Recognition” below. The Company’s results of operations and comprehensive income for the three and nine months ended September 30, 2018 and cash flows for the nine months ended September 30, 2018 are not necessarily indicative of results that may be expected for the year ending December 31, 2018, or for any future period.
Certain prior-year amounts have been adjusted to conform with the adoption of ASC 606, Revenue from Contracts with Customers (“ASC 606”), which became effective for the Company beginning on January 1, 2018. Refer to “Recently Adopted Authoritative Guidance” for the effects of adoption of ASC 606 and the section below for the updated revenue recognition policy.
Certain prior-year amounts have been reclassified to conform with current-period presentation. These reclassifications include (i) reclassification of revenues from services and other revenues to product revenues of $0.2 million and $0.5 million for the three and nine months ended September 30, 2017, respectively, related to software term-license sales, (ii) a change in inventories presentation related to allocation of inventories obsolete reserve between finished goods, raw materials, and work in progress in the Notes to the Condensed Consolidated Financial Statements, and (iii) a change in intangible assets presentation related to presenting foreign currency impact separately in the Notes to the Condensed Consolidated Financial Statements. In addition, $0.6 million was reclassified from services and other revenues to product revenues for the nine months ended September 30, 2018 in order to conform with the presentation for the three months ended September 30, 2018. These changes were not deemed material and were included to conform with current-period classification and presentation.
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.
Revenue Recognition
The Company earns revenues from sales of its medication and medical and surgical supply automation systems, along with consumables and related services, which are sold in the healthcare industry, its principal market. The transaction price of each contract with a customer is allocated to the identified performance obligations based on the relative fair value of each obligation. 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.
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.
Prior to recognizing revenue, the Company identifies the contract, performance obligations, and transaction price, and allocates the transaction price to the performance obligations. All identified contracts meet the following required criteria:
Parties to the contract have approved the contract (in writing, orally, or in accordance with other customary business practices) and are committed to perform their respective obligations. A majority of the Company’s contracts are evidenced by a non-cancelable written agreement. Contracts for consumable products are generally evidenced by an order placed via phone or a manual purchase order.
Entity can identify each party’s rights regarding the goods or services to be transferred. Contract terms are documented within the written agreements. Where a written contract does not exist, such as for consumable products, the rights of each party are understood as following the Company’s standard business process and terms.
The entity can identify the payment terms for the goods or services to be transferred. Payment terms are documented within the agreement and are generally net 30 days from shipment of tangible product or services performed. Where a written contract does not exist, the Company’s standard payment terms are net 30 day terms.
The contract has commercial substance (that is the risk, timing, or amount of the entity’s future cash flows is expected to change as a result of the contract.) The Company’s agreements are an exchange of cash for a combination of products and services which result in changes in the amount of the Company’s future cash flows.
It is probable the entity will collect the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer. The Company performs a credit check for all significant customers or transactions and where collectability is not probable, payment in full or a substantial down payment is typically required to help assure the full agreed upon contract price will be collected.
The Company often enters into change orders which modify the product to be received by the customer pursuant to certain contracts. Changes to any contract are accounted for as a modification of the existing contract to the extent the goods and services to be delivered as part of the contract are generally consistent with the nature and type of those to be provided under the terms of the original contract. Examples of such change orders include the addition or removal of units of equipment or changes to the configuration of the equipment where the overall nature of the contract remains intact. The Company’s change orders generally result in the change being accounted for as modifications of existing contracts given the nature of the impacted orders.
Distinct goods or services are identified as performance obligations. A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer are considered a single performance obligation. Where a good or service is determined not to be distinct, the Company combines the good or service with other promised goods or services until a bundle of goods or services that is distinct is identified. To identify its performance obligations, the Company considers all of the products or services promised in the contract regardless of whether they are explicitly stated or are implied by customary business practices. When performance obligations are included in separate contracts, the Company considers an entire customer arrangement to determine if separate contracts should be considered combined for the purposes of revenue recognition. Most of the Company’s sales, other than renewals of support and maintenance, contain multiple performance obligations, with a combination of hardware systems, consumables and software products, support and maintenance, and professional services.
The transaction price of a contract is determined based on the fixed consideration, net of an estimate for variable consideration such as various discounts or rebates provided to customers. As a result of the Company’s commercial selling practices, contract prices are generally fixed with minimal, if any, variable consideration.
The transaction price is allocated to separate performance obligations 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 expected cost plus a margin approach to identify the standalone selling price of goods where separate sales transactions do not exist. For software and services which do not have a specific identifiable product cost, the Company uses an amount discounted from the list price as a best estimated selling price.
The Company recognizes revenue when the performance obligation has been satisfied by transferring a promised good or service to a customer. The good or service is transferred when or as the customer obtains control of the good or service. Determining when control transfers requires management to make judgments that affect the timing of revenues recognized.
Generally, for products requiring a complex implementation, control passes when the product is installed and ready for use. For all other products, control generally passes when product has been shipped and title has passed. For maintenance contracts and certain other services provided on a subscription basis, control passes to the customer over time, generally ratably over the service term as the Company provides a stand-ready service to service the customer’s equipment. Time and material services transfer control to the customer at the time the services are provided. The portion of the transaction price allocated to the Company’s unsatisfied performance obligations recorded as deferred revenues at September 30, 2018 and December 31, 2017 were $98.4 million and $89.4 million, respectively, of which $87.8 million and $78.8 million, respectively, are expected to be completed within one year. 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.
Revenues, contract assets, and contract liabilities are recorded net of associated taxes.
The payment terms associated with the Company’s contracts vary, however, payment terms for product revenues are generally based on milestones tied to contract signing, shipment of products, and/or customer acceptance. Payment terms associated with the service portion of agreements are generally periodic and can be billed on a monthly, quarterly, or annual basis. In certain circumstances multiple years are billed at one time. The portion of these contract liabilities not expected to be recognized as revenue within twelve months of the balance sheet date are considered long term.
In the normal course of business, the Company typically does not accept product returns unless the item is defective as manufactured or the configuration of the product is incorrect. The Company establishes provisions for estimated returns based on historical product returns. The allowance for sales returns is not material to the Condensed Consolidated Financial Statements for any periods presented.
A portion of the Company's sales are made through multi-year lease agreements. Under sales-type leases, the Company recognizes revenue for its hardware and software products net of lease execution costs, such as post-installation product maintenance and technical support, at the net present value of the lease payment stream once its installation obligations have been met. The Company optimizes cash flows by selling a majority of its non-U.S. government 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. Revenues from sales-type leases of $11.4 million and $5.9 million for the three months ended September 30, 2018 and 2017, respectively, and $28.8 million and $19.3 million for the nine months ended September 30, 2018 and 2017, respectively, are included in product revenues in the Condensed Consolidated Statements of Operations. Interest income in these leases is recognized in product revenues using the effective interest method.
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 $2.1 million for the three months ended September 30, 2018 and 2017, respectively, and $6.2 million and $5.4 million for the nine months ended September 30, 2018 and 2017, respectively.
Contract Assets and Contract Liabilities
A contract asset is a right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditional and is not just subject to the passage of time. A receivable will be recorded on the balance sheet when the Company has unconditional rights to consideration. A contract liability is an obligation to transfer goods or services for which the Company has received consideration, or for which an amount of consideration is due from the customer. Contract liabilities include customer deposits under non-cancelable contracts, and current and non-current deferred revenue balances. The Company’s contract balances are reported in a net contract asset or liability position on a contract-by-contract basis at the end of each reporting period.
The following table reflects the Company’s contract assets and contract liabilities:
September 30, 2018
December 31, 2017
(In thousands)
Short-term unbilled receivables - included in accounts receivable and unbilled receivables
$
9,475
$
4,590
Long-term unbilled receivables - included in other long-term assets
15,573
9,475
Total contract assets
$
25,048
$
14,065
Short-term deferred revenues
$
87,777
$
78,774
Long-term deferred revenues
10,634
10,623
Total contract liabilities
$
98,411
$
89,397
Significant changes in the contract assets and the contract liabilities balances during the period are the result of the issuance of invoices and recognition of deferred revenues in the normal course of business. Unbilled contract assets which were invoiced during the three and nine months ended September 30, 2018 as a result of the right to invoice for the transaction consideration becoming unconditional were not material. The contract modifications entered into during the three and nine months ended September 30, 2018 did not have a significant impact on the Company’s contract assets or deferred revenues. During the three and nine months ended September 30, 2018, the Company recognized revenues of $10.9 million and $78.9 million, respectively, that was included in the corresponding deferred revenue balance as of December 31, 2017.
Contract Costs
The Company has determined that the incentive portions of its sales commission plans require capitalization since these payments are directly related to sales achieved during a time period. These commissions are earned on the basis of the total purchase order value of new product bookings. Since there are not commensurate commissions earned on renewal of the service bookings, the Company concluded that the capitalized asset is related to services provided under both the initial contract and renewal periods. The Company applies a practical expedient to account for the incremental costs of obtaining a contract to a portfolio of contracts with similar characteristics as the Company expects the effect on the financial statements of applying the practical expedient would not differ materially from applying the accounting guidance to the individual contracts within the portfolio. A pool of contracts is defined as all contracts booked in a particular quarter. The amortization for the capitalized asset is an estimate of the pool’s original contract term, generally one to five years, plus an estimate of future customer renewal periods resulting in a total amortization period of ten years. Costs to obtain a contract are allocated amongst performance obligations and recognized as sales and marketing expense consistent with the pattern of revenue recognition. Capitalized costs are periodically reviewed for impairment. A portion of the pool’s capitalized asset is recorded as an expense after two quarters, which represents the estimated period during which the product revenue associated with the contract is recorded. The remaining contract cost is recorded as expense ratably over the ten year estimated initial and renewal service periods. The Company recognized contract cost expense of $5.3 million and $4.6 million during the three months ended September 30, 2018 and 2017, respectively, and $16.2 million and $13.3 million during the nine months ended September 30, 2018 and 2017, respectively. The portion of commission expenses paid as of the balance sheet date to be recognized in future periods is recorded in long term prepaid commissions on the Condensed Consolidated Balance Sheets. There was no impairment loss recorded related to capitalized prepaid commissions as of and for the three and nine months ended September 30, 2018.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the Company’s Condensed Consolidated Financial Statements and accompanying Notes. Management bases its estimates on historical experience and various other assumptions believed to be reasonable. Although these estimates are based on management’s best knowledge of current events and actions that may impact the Company in the future, actual results may be different from the estimates. The Company’s critical accounting policies are those that affect its financial statements materially and involve difficult, subjective or complex judgments by management. Those policies are revenue recognition; accounts receivable and notes receivable from investment in sales-type leases; inventory valuation; capitalized software development costs; valuation and impairment of goodwill; purchased intangibles and long-lived assets; fair value of assets acquired and liabilities assumed in business combination; share-based compensation; and accounting for income taxes.
The Company’s Chief Operating Decision Maker (“CODM”) is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company’s segments using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs that are not specific to either of the reportable segments and are managed separately at the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain other administrative expenses. See Note 14, Segment and Geographical Information, for additional information on segment reporting.
Recently Adopted Authoritative Guidance
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASC 606, Revenue from Contracts with Customers, a new standard related to revenue recognition. Under the new standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenues and cash flows arising from contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). The Company adopted the standard using the full retrospective method effective beginning January 1, 2018.
Under the ASC 606 guidance, fees paid to GPOs are now presented as a reduction of product revenues, whereas these fees were considered a part of selling, general, and administrative costs under the previous guidance. The majority of the incremental costs incurred to obtain a contract, primarily commission expense, are recognized during the first year with the balance recognized ratably over a period of ten years. Additionally, revenue on term software licenses is recognized upon installation of the license rather than ratably over the life of the term license. Finally, the Company no longer defers the contingent revenue in transactions where the amount charged to the customer for a particular performance obligation is less than the allocation of standalone selling price.
Adoption of the standard related to revenue recognition impacted the Company’s reported results as follows:
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements on fair value measurements. ASU 2018-13 is effective for the Company beginning January 1, 2020, with early adoption permitted. The Company early adopted this guidance effective beginning July 1, 2018. The application of this guidance did not have a material effect on the Company’s consolidated financial statements.
Recently Issued Authoritative Guidance
In February 2016, the FASB issued ASU No. 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 will also require significant additional disclosures about the amount and timing of cash flows from leases. This new guidance will be effective for the Company beginning January 1, 2019. In July 2018, the FASB issued amendments in ASU No. 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 expects to elect this transition approach and recognize the cumulative impact of adoption in the opening balance of retained earnings as of January 1, 2019. The Company is in the process of completing a qualitative and quantitative assessment of the lease portfolio, implementing a new lease accounting system and implementing new processes and controls to account for leases in accordance with the new standard. The Company believes the most significant changes to the financial statements will relate to the recognition of right-of-use assets and offsetting lease liabilities in the consolidated balance sheet for operating leases. The actual impact on the consolidated balance sheet will be contingent upon the Company's population of operating leases at adoption, however the Company does not expect the standard to have a material impact on cash flows or results of operations.
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 will be effective for the Company beginning January 1, 2019. The Company does not expect application of this guidance to have a material effect on its consolidated financial statements.
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. Business Acquisitions
2017 Acquisitions
On April 12, 2017, the Company completed the acquisition of all of the membership interests of Dixie Drawl, LLC d/b/a InPharmics (“InPharmics”). InPharmics is a technology and services company that provides advanced pharmacy informatics solutions to hospital pharmacies. The total consideration for the transaction was $5.0 million, net of cash acquired of $0.3 million, and includes $0.5 million holdback for potential settlement of performance obligations. At September 30, 2018, this amount has been presented as a short-term liability.
The Company accounted for the acquisition of InPharmics in accordance with the authoritative guidance on business combinations; therefore, the tangible and intangible assets acquired and liabilities assumed were recorded at fair value on the acquisition date. The purchase price was preliminarily allocated to intangible assets in the amount of $1.9 million, which included developed technology and customer contracts, with the remainder allocated to goodwill.
The results of the InPharmics’ operations have been included in the Company’s consolidated results of operations and are presented as part of the Automation and Analytics segment.
Note 3. Net Income (Loss) Per Share
Basic net income (loss) per share is computed by dividing net income (loss) for the period by the weighted-average number of shares outstanding during the period, less shares repurchased. 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.
The basic and diluted net income (loss) per share calculation for the three and nine months ended September 30, 2018 and 2017 was as follows:
Three months ended September 30,
Nine months ended September 30,
2018
2017
2018
2017
(In thousands, except per share data)
Net income (loss)
$
13,628
$
7,748
$
22,936
$
(707
)
Weighted-average shares outstanding — basic
39,432
37,698
39,015
37,266
Effect of dilutive securities from stock award plans
1,428
1,275
1,222
—
Weighted-average shares outstanding — diluted
$
40,860
$
38,973
40,237
37,266
Net income (loss) per share - basic
$
0.35
$
0.21
$
0.59
$
(0.02
)
Net income (loss) per share - diluted
$
0.33
$
0.20
$
0.57
$
(0.02
)
Anti-dilutive weighted-average shares related to stock award plans
Note 4. Cash and Cash Equivalents and Fair Value of Financial Instruments
Cash and cash equivalents of $44.2 million and $32.4 million as of September 30, 2018 and December 31, 2017, respectively, consisted of demand deposits only.
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.
The fair value of the interest rate swap agreements at September 30, 2018 and December 31, 2017 was $1.0 million and $1.4 million, respectively. There were no amounts reclassified into current earnings due to ineffectiveness during the periods presented.
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 and foreign currency contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.
The following table represents the fair value hierarchy of the Company’s financial assets and financial liabilities measured at fair value as of September 30, 2018:
Level 1
Level 2
Level 3
Total
(In thousands)
Interest rate swap contracts
$
—
$
957
$
—
$
957
Total financial assets
$
—
$
957
$
—
$
957
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, 2017:
Level 1
Level 2
Level 3
Total
(In thousands)
Interest rate swap contracts
$
—
$
1,378
$
—
$
1,378
Total financial assets
$
—
$
1,378
$
—
$
1,378
Net Investment in Sales-Type Leases. The carrying amount of the Company’s sales-type lease receivables is a reasonable estimate of fair value, as the unearned interest income is immaterial.
Balance sheet details as of September 30, 2018 and December 31, 2017 are presented in the tables below:
September 30, 2018
December 31, 2017
(In thousands)
Inventories:
Raw materials
$
32,529
$
31,275
Work in process
9,929
8,718
Finished goods
56,773
56,144
Total inventories
$
99,231
$
96,137
Property and equipment:
Equipment
$
77,837
$
69,550
Furniture and fixtures
7,961
6,534
Leasehold improvements
16,209
10,976
Software
39,611
37,168
Construction in progress
11,428
9,813
Property and equipment, gross
153,046
134,041
Accumulated depreciation and amortization
(102,562
)
(91,446
)
Total property and equipment, net
$
50,484
$
42,595
Other long term assets:
Capitalized software, net
$
52,088
$
38,599
Unbilled receivables
15,573
9,475
Other assets
1,287
1,242
Total other long term assets, net
$
68,948
$
49,316
Accrued liabilities:
Advance payments from customers
$
4,850
$
7,779
Rebates and lease buyouts
8,273
5,428
Group purchasing organization fees
4,023
3,449
Taxes payable
5,770
9,183
Other accrued liabilities
12,861
9,854
Total accrued liabilities
$
35,777
$
35,693
Depreciation expense of property and equipment was $3.7 million and $3.8 million for the three months ended September 30, 2018 and 2017, respectively. Depreciation expense of property and equipment was $11.0 million and $12.1 million for the nine months ended September 30, 2018 and 2017, respectively.
The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for the three and nine months ended September 30, 2018 and 2017:
Three months ended September 30,
2018
2017
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
$
(8,896
)
$
953
$
(7,943
)
$
(8,765
)
$
1,274
$
(7,491
)
Other comprehensive income (loss) before reclassifications
(907
)
90
(817
)
1,389
35
1,424
Amounts reclassified from other comprehensive income (loss), net of tax
—
(324
)
(324
)
—
(109
)
(109
)
Net current-period other comprehensive income (loss), net of tax
(907
)
(234
)
(1,141
)
1,389
(74
)
1,315
Ending balance
$
(9,803
)
$
719
$
(9,084
)
$
(7,376
)
$
1,200
$
(6,176
)
Nine months ended September 30,
2018
2017
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
$
(6,954
)
$
841
$
(6,113
)
$
(10,764
)
$
1,245
$
(9,519
)
Other comprehensive income (loss) before reclassifications
(2,849
)
686
(2,163
)
3,388
111
3,499
Amounts reclassified from other comprehensive income (loss), net of tax
—
(808
)
(808
)
—
(156
)
(156
)
Net current-period other comprehensive income (loss), net of tax
(2,849
)
(122
)
(2,971
)
3,388
(45
)
3,343
Ending balance
$
(9,803
)
$
719
$
(9,084
)
$
(7,376
)
$
1,200
$
(6,176
)
Note 6. Net Investment in Sales-Type Leases
On a recurring basis, the Company enters into sales-type lease transactions with the majority varying in length from one to five years. The receivables as a result of these types of transactions are collateralized by the underlying equipment leased and consist of the following components at September 30, 2018 and December 31, 2017:
September 30, 2018
December 31, 2017
(In thousands)
Net minimum lease payments to be received
$
28,306
$
25,899
Less: Unearned interest income portion
(2,386
)
(1,695
)
Net investment in sales-type leases
25,920
24,204
Less: Short-term portion(1)
(8,472
)
(8,769
)
Long-term net investment in sales-type leases
$
17,448
$
15,435
_________________________________________________
(1)
The short-term portion of the net investments in sales-type leases is included in other current assets in the Condensed Consolidated Balance Sheets.
The Company evaluates its sales-type leases individually and collectively for impairment. The allowance for credit losses was $0.2 million as of September 30, 2018 and December 31, 2017, respectively.
Amortization expense of intangible assets was $5.8 million and $6.4 million for the three months ended September 30, 2018 and 2017, respectively. Amortization expense of intangible assets was $17.8 million and $19.4 million for the nine months ended September 30, 2018 and 2017, respectively.
The estimated future amortization expenses for amortizable intangible assets were as follows:
September 30, 2018
(In thousands)
Remaining three months of 2018
$
5,685
2019
17,954
2020
16,754
2021
15,417
2022
14,069
Thereafter (excluding in-process technology)
76,189
Total
$
146,068
Note 8. Debt
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 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 another 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 in accordance with the accounting guidance. The debt issuance costs are being amortized to interest expense using the straight line method from issuance date through 2021. Interest expense (exclusive of fees and issuance cost amortization) was approximately $1.9 million and $1.6 million for the three months ended September 30, 2018 and 2017, respectively, and approximately $5.7 million and $4.6 million for the nine months ended September 30, 2018 and 2017, respectively. Amortization expense related to fees and issuance cost was approximately $0.6 million and $0.4 million for the three months ended September 30, 2018 and 2017, respectively, and approximately $1.7 million and $1.2 million for the nine months ended September 30, 2018 and 2017, respectively. The Company was in compliance with all covenants as of September 30, 2018 and December 31, 2017.
During the nine months ended September 30, 2018, the Company repaid $27.0 million under these Facilities.
The components of the Company’s debt obligations as of September 30, 2018 and December 31, 2017 were as follows:
December 31, 2017
Borrowings
Repayment / Amortization
September 30, 2018
(In thousands)
Term loan facility
$
182,500
$
—
$
(12,500
)
$
170,000
Revolving credit facility
34,500
—
(14,500
)
20,000
Total debt under the facilities
217,000
—
(27,000
)
190,000
Less: Deferred issuance cost
(6,875
)
—
1,718
(5,157
)
Total debt, net of deferred issuance cost
$
210,125
$
—
$
(25,282
)
$
184,843
Long term debt, current portion, net of deferred issuance cost
15,208
17,708
Long term debt, net of deferred issuance cost
$
194,917
$
167,135
As of September 30, 2018, the carrying amount of debt of $190.0 million approximates the comparable fair value of $192.6 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 September 30, 2018 as compared to the period as of December 31, 2017.
Note 9. Deferred Revenues
Short-term deferred revenues of $87.8 million and $78.8 million include deferred revenues from product sales and service contracts, net of deferred cost of sales of $14.9 million and $16.9 million as of September 30, 2018 and December 31, 2017, 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.
Long-term deferred revenues include deferred revenues from service contracts of $10.6 million as of both September 30, 2018 and December 31, 2017.
Note 10. Commitments and Contingencies
Lease Commitments
The Company leases office space and office equipment under operating leases. Commitments under operating leases primarily relate to leasehold property and office equipment. At September 30, 2018, the minimum future payments on non-cancelable operating leases were as follows:
(In thousands)
Remaining three months of 2018
$
3,392
2019
13,329
2020
11,416
2021
10,458
2022
8,655
Thereafter
26,634
Total minimum future lease payments
$
73,884
Purchase Obligations
In the ordinary course of business, the Company issues purchase orders based on its current manufacturing needs. At September 30, 2018, the Company had non-cancelable purchase commitments of $75.9 million, which are expected to be paid within the next twelve months.
Legal Proceedings
The Company is currently involved in various legal proceedings. As required under ASC 450, Contingencies, the Company accrues for contingencies when it believes that a loss is probable and that it can reasonably estimate the amount of any such loss. The Company has not recorded any accrual for contingent liabilities associated with the legal proceedings described below based on its belief that any potential loss, while reasonably possible, is not probable. Further, any possible range of loss in 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 seeks 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 has been held in abeyance pending a decision of the Illinois Supreme Court in a separate case involving BIPA issues. The court has scheduled a status conference in the case for February 20, 2019. 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 yet responded to the complaint. The Company filed a motion to stay proceedings in this litigation pending the outcome of the Underlying Action. The court has granted the Company’s motion to stay the requirement to respond to the complaint pending the resolution of the motion to stay the litigation. The Company intends to defend the lawsuit vigorously.
Note 11. Income Taxes
On December 22, 2017, the Tax Act was signed into law, most provisions of which became effective starting in 2018, including the reduction of the statutory corporate income tax rate from 35% to 21%. As of September 30, 2018, the Company has not completed the accounting for the tax effects of enactment of the Tax Act; however, in the fourth quarter of 2017, the Company made a reasonable estimate of the effects on the existing deferred tax balances and the one-time transition tax. No adjustments to the provisional amounts recorded in the fourth quarter of 2017 were made during the three and nine months ended September 30, 2018, respectively. For the nine months ended September 30, 2018, the Company assessed the effect of certain international provisions of the Tax Act that became effective January 1, 2018, and determined that these provisions had an immaterial impact; therefore, the Company did not record any impact as a result of the assessment. The Company will continue to analyze the provision for income taxes under the Tax Act as future guidance is issued. Any revisions will be treated in accordance with the measurement period guidance outlined in SEC Staff Accounting Bulletin No. 118.
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 19.0% and 34.4% for the nine months ended September 30, 2018 and 2017, respectively.
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. The 2017 annual effective tax rate differed from the statutory rate of 35% primarily due to the favorable impact of the research and development credits, which were partially offset by the unfavorable impact of state income taxes, foreign rate differential, and non-deductible equity charges.
As of September 30, 2018 and December 31, 2017, the Company had gross unrecognized tax benefits of $10.2 million and $10.7 million, respectively. It is the Company’s policy to classify accrued interest and penalties as part of the unrecognized tax benefits, but to record the interest and penalties in operating expense. As of September 30, 2018 and December 31, 2017, the amount of accrued interest and penalties was $1.8 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 September 30, 2018, the Company is no longer subject to U.S., state, and foreign examination for years before 2015, 2013, 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 12. Employee Benefits and Share-Based Compensation
Stock-Based Plans
For a detailed explanation of the Company's stock plans and subsequent changes, please refer to Note 11, Employee Benefits and Share-Based Compensation, of the Company's annual report on Form 10-K for the year ended December 31, 2017 filed with the SEC on February 27, 2018.
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 and nine months ended September 30, 2018 and 2017:
Three months ended
Nine months ended
September 30, 2018
September 30, 2017
September 30, 2018
September 30, 2017
(In thousands)
Cost of product and service revenues
$
1,150
$
882
$
3,346
$
2,727
Research and development
1,397
915
4,068
2,651
Selling, general, and administrative
4,538
3,462
13,437
10,937
Total share-based compensation expense
$
7,085
$
5,259
$
20,851
$
16,315
Stock Options and ESPP Shares
The following assumptions were used to value share options and Employee Stock Purchase Plan (“ESPP”) shares granted pursuant to the Company’s equity incentive plans for the three and nine months ended September 30, 2018 and 2017:
The following table summarizes the share option activity under the Company’s equity incentive plans during the nine months ended September 30, 2018:
Number of
Shares
Weighted-Average
Exercise Price
Weighted-Average
Remaining Years
Aggregate
Intrinsic Value
(In thousands, except per share data)
Stock options
Outstanding at December 31, 2017
3,323
$
32.72
7.6
$
53,953
Granted
937
47.36
Exercised
(584
)
24.63
Expired
(12
)
23.38
Forfeited
(228
)
38.85
Outstanding at September 30, 2018
3,436
$
37.71
7.7
$
117,493
Exercisable at September 30, 2018
1,247
$
27.44
5.7
$
55,462
Vested and expected to vest at September 30, 2018 and thereafter
3,240
$
37.24
7.6
$
112,292
The weighted-average fair value per share of options granted during the three months ended September 30, 2018 and 2017 was $17.45 and $12.49, respectively, and the weighted-average fair value per share of options granted during the nine months ended September 30, 2018 and 2017 was $15.02 and $11.22, respectively. The intrinsic value of options exercised during the three months ended September 30, 2018 and 2017 was $8.2 million and $6.8 million, respectively, and the intrinsic value of options exercised during the nine months ended September 30, 2018 and 2017 was $16.7 million and $14.6 million, respectively.
As of September 30, 2018, total unrecognized compensation cost related to unvested stock options was $24.5 million, which is expected to be recognized over a weighted-average vesting period of 2.9 years.
Employee Stock Purchase Plan Activity
For the nine months ended September 30, 2018 and 2017, employees purchased approximately 452,038 and 465,696 shares of common stock, respectively, under the ESPP at weighted average prices of $29.69 and $25.78, respectively. As of September 30, 2018, the unrecognized compensation cost related to the shares to be purchased under the ESPP was approximately $5.6 million and is expected to be recognized over a weighted-average period of 1.5 years.
Restricted Stock Units and Restricted Stock Awards
Summaries of restricted stock activity under the Company’s 2009 Equity Incentive Plan, as amended (the “2009 Plan”) are presented below for the nine months ended September 30, 2018:
Number of
Shares
Weighted-Average
Grant Date Fair Value
Weighted-Average
Remaining Years
Aggregate
Intrinsic Value
(In thousands, except per share data)
Restricted stock units (“RSUs”)
Outstanding at December 31, 2017
501
$
38.90
1.5
$
24,293
Granted
138
46.04
Vested
(131
)
34.34
Forfeited
(58
)
38.55
Outstanding and unvested at September 30, 2018
450
$
42.45
1.3
$
32,339
As of September 30, 2018, total unrecognized compensation expense related to RSUs was $16.0 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.6 years.
As of September 30, 2018, total unrecognized compensation cost related to RSAs was $0.6 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.6 years.
Performance-Based Restricted Stock Units
A summary of the performance-based restricted stock activity under the 2009 Plan during the nine months ended September 30, 2018 is presented below:
Number of
Shares
Weighted-Average
Grant Date Fair Value Per Unit
(In thousands, except per share data)
Performance-based restricted stock units (“PSUs”)
Outstanding at December 31, 2017
225
$
31.18
Granted
110
38.03
Vested
(67
)
30.46
Forfeited
(32
)
34.47
Outstanding and unvested at September 30, 2018
236
$
34.13
As of September 30, 2018, total unrecognized compensation cost related to PSUs was $3.4 million, which is expected to be recognized over the remaining weighted-average period of 1.2 years.
Summary of Shares Reserved for Future Issuance under Equity Incentive Plans
The Company had the following ordinary shares reserved for future issuance under its equity incentive plans as of September 30, 2018:
Number of Shares
(In thousands)
Share options outstanding
3,436
Non-vested restricted share awards
707
Shares authorized for future issuance
3,118
ESPP shares available for future issuance
1,913
Total shares reserved for future issuance
9,174
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 September 30, 2018, 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 program at any time.
During the three and nine months ended September 30, 2018 and 2017, the Company did not repurchase any of its outstanding common stock.
Note 13. 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, as amended (the “Securities Act”), including sales made directly on the Nasdaq Stock Market, or sales made to or through a market maker other than on an exchange.
During the three and nine months ended September 30, 2018, the Company did not sell any of its common stock under the Distribution Agreement. As of September 30, 2018, the Company had an aggregate of $110.3 million available to be offered under the Distribution Agreement.
Note 14. Segment and Geographical Information
The CODM is its Chief Executive Officer. The CODM allocates resources and evaluates the performance of the Company’s segments using information about its revenues, gross profit, and income from operations. Such evaluation excludes general corporate-level costs that are not specific to either of the reportable segments and are managed separately at the corporate level. Corporate-level costs include expenses related to executive management, finance and accounting, human resources, legal, training and development, and certain administrative expenses.
The two operating segments, which are the same as the Company’s two reportable segments, are as follows:
•
Automation and Analytics. The Automation and Analytics segment is organized around the design, manufacturing, selling, and servicing of medication and supply dispensing systems; pharmacy inventory management systems; and related software. The Automation and Analytics products are designed to enable the Company’s customers to enhance and improve the effectiveness of the medication-use process, the efficiency of the medical-surgical supply chain, overall patient care, and clinical and financial outcomes of medical facilities. Through modular configuration and upgrades, the Company’s systems can be tailored to specific customer needs. The financial results of InPharmics acquired in the second quarter of 2017 are included in the Automation and Analytics segment.
•
Medication Adherence. The Medication Adherence segment includes solutions to assist patients to remain adherent to their medication regimens. These solutions are comprised of a variety of tools and aids that may be directly used by a pharmacist or a healthcare provider in their direct care for a patient, or the patient themselves, and include software-based systems and medication adherence packaging. Software solutions primarily operate on the Omnicell Patient Engagement platform, a subscription-based software system which provides an environment for patient engagement by clinicians. Services running on this platform include medication synchronization, immunization management, medication therapy management, and a number of tools used by clinicians to manage patient engagement workflows. Medication Adherence packaging is designed either for patient use in care environments where there is a caregiver present or for environments where the patient cares for him or herself and includes the manufacturing and selling of consumable medication blister cards, packaging equipment, and ancillary products and services.
The following tables summarize the financial performance of the Company’s reportable segments, including a reconciliation of income from segment operations to income from total operations:
Three months ended September 30,
2018
2017
Automation and Analytics
Medication Adherence
Total
Automation and Analytics
Medication Adherence
Total
(In thousands)
Revenues:
Product revenues
$
120,248
$
29,461
$
149,709
$
110,368
$
26,470
$
136,838
Services and other revenues
48,055
6,503
54,558
44,249
5,661
49,910
Total revenues
168,303
35,964
204,267
154,617
32,131
186,748
Cost of revenues:
Cost of product revenues
54,958
24,191
79,149
59,811
19,914
79,725
Cost of services and other revenues
22,214
3,995
26,209
19,929
2,275
22,204
Total cost of revenues
77,172
28,186
105,358
79,740
22,189
101,929
Gross profit
91,131
7,778
98,909
74,877
9,942
84,819
Operating expenses
46,015
10,624
56,639
44,332
9,901
54,233
Income from operations
$
45,116
$
(2,846
)
$
42,270
$
30,545
$
41
$
30,586
Corporate costs
24,775
18,389
Income from operations
$
17,495
$
12,197
Nine months ended September 30,
2018
2017
Automation and
Analytics
Medication
Adherence
Total
Automation and
Analytics
Medication
Adherence
Total
(In thousands)
Revenues:
Product revenues
$
335,441
$
79,563
$
415,004
$
292,463
$
73,371
$
365,834
Services and other revenues
142,633
17,922
160,555
132,908
17,601
150,509
Total revenues
478,074
97,485
575,559
425,371
90,972
516,343
Cost of revenues:
Cost of product revenues
168,506
61,136
229,642
170,974
54,077
225,051
Cost of services and other revenues
65,594
10,176
75,770
58,243
7,907
66,150
Total cost of revenues
234,100
71,312
305,412
229,217
61,984
291,201
Gross profit
243,974
26,173
270,147
196,154
28,988
225,142
Operating expenses
142,572
31,119
173,691
139,902
31,196
171,098
Income (loss) from segment operations
$
101,402
$
(4,946
)
$
96,456
$
56,252
$
(2,208
)
$
54,044
Corporate costs
70,994
59,100
Income (loss) from operations
$
25,462
$
(5,056
)
Significant Customers
There were no customers that accounted for more than 10% of the Company’s total revenues for the three and nine months ended September 30, 2018 and 2017. Also, there were no customers that accounted for more than 10% of the Company’s accounts receivable as of September 30, 2018 and December 31, 2017.