Source: http://ir.omnicell.com/node/12506/html
Timestamp: 2019-04-25 22:11:35+00:00

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The number of shares of Registrants common stock (par value $0.001) outstanding as of November 2, 2009 was 31,918,623.
(1) Information derived from our December 31, 2008 audited Consolidated Financial Statements.
Description of the Company. Omnicell, Inc. (Omnicell, our, us, we, or the Company) was incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. Our major products are medication and supply dispensing systems which are sold in our principal market, which is the healthcare industry. Our market is primarily located in the United States.
Basis of Presentation. These interim condensed consolidated financial statements are unaudited but reflect, in the opinion of management, all adjustments, consisting of normal recurring adjustments and accruals, necessary to present fairly the financial position of Omnicell and its subsidiaries as of September 30, 2009 and 2008, and the results of operations for the three and nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008. Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or GAAP, have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2008.
Our results of operations for the three and nine months ended September 30, 2009 and cash flows for the nine months ended September 30, 2009 are not necessarily indicative of results that may be expected for the year ending December 31, 2009, or for any future period.
Use of estimates. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Principles of consolidation. The condensed consolidated financial statements include the accounts of our wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Reclassifications. Certain reclassifications have been made to prior year reported accounts receivable, other current assets, obligations resulting from sale of receivables and accrued liabilities in the condensed consolidated balance sheet to conform with the current year balance sheet presentation. Certain prior period amounts in our unaudited condensed consolidated statement of cash flows have been reclassified to conform to the current period presentation. Amounts reclassified include other current assets, accrued liabilities and acquisition of privately held company, net of cash acquired.
Fair value of financial instruments. Effective January 1, 2008, we adopted Accounting Standards Codification, or ASC, 820, Fair Value Measurements and Disclosures (formerly referred to as SFAS No. 157), on a prospective basis for our financial assets and liabilities recognized at fair value on a recurring basis using the fair value hierarchy established in ASC 820.
Level 3 inputs, which include unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the underlying asset or liability. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, as well as significant management judgment or estimation.
At September 30, 2009 and December 31, 2008, our financial assets utilizing Level 1 inputs included cash equivalents. For these items, quoted market prices are readily available and fair value approximates carrying value. We do not currently have any financial instruments utilizing Level 2 and Level 3 inputs.
Sales of accounts receivable. We offer our customers multi-year, non-cancelable payment terms. Generally we sell non-U.S. government receivables to third-party leasing companies on a non-recourse basis. We reflect the financing costs on the sale of these receivables as a component of our revenue. We record our revenue at the net present value of the multi-year payment stream using the contractual interest rate charged to us by the third-party leasing company. We record the sale of our accounts receivables as true sales in accordance with ASC 860, Transfers and Servicing (formerly referred to as SFAS No. 140). During the nine months ended September 30, 2009 and 2008, we transferred non-recourse accounts receivable totaling $30.1million and $52.2 million, respectively, which approximated fair value, to third party leasing companies. At September 30, 2009 and December 31, 2008, accounts receivable included $3.9 million and $4.7 million, respectively, due from third party leasing companies for transferred non-recourse accounts receivable. Due to the nature of the recourse clauses in certain sales arrangements, we recorded $0.04 million and $0.2 million as of September 30, 2009 and December 31, 2008, respectively, as receivables subject to sales agreements and obligations resulting from sales of receivables.
Dependence on suppliers. We have significant supply agreements with two suppliers for construction and supply of several sub-assemblies and inventory management of sub-assemblies used in our hardware products. There are no minimum purchase requirements. The contracts may be terminated by either the supplier or by us without cause and at any time upon delivery of two to six months notice. Purchases from these suppliers for the three and nine months ended September 30, 2009 were approximately $5.1 million and $17.4 million, respectively. Purchases from these suppliers for the comparable periods in 2008 were approximately $7.5 million and $20.1 million, respectively.
Income Taxes. For the three and nine months ended September 30, 2009, we recorded an income tax expense of $0.1 million and a benefit of $0.2 million, respectively, as compared with an income tax expense of $2.0 million and $7.0 million for the corresponding periods in 2008. The effective tax rate for the three and nine months ended September 30, 2009 was 14.6% and 59.5% as compared to effective tax rates of 40.4% and 42.6% for the corresponding periods in 2008. The decrease in the effective tax rate for the three months ended September 30, 2009 as compared to the corresponding period in 2008 is due to a $0.3 million change in estimate relating to our prior years provision for income taxes. The increase of the effective tax rate for the nine months ended September 30, 2009 as compared to the corresponding period in 2008 is due mostly to the re-measurement of the California deferred tax assets as discussed below. The estimated annual tax rate differs from the statutory tax rate of 35% primarily due to the impact of state income taxes and statutory stock compensation options charges under ASC 718 (formerly referred to as SFAS No. 123(R)), partially offset by the benefit from research and development tax credits.
In February 2009, California enacted a change in law that allows an elective single sales factor apportionment for taxable years beginning on or after January 1, 2011. We expect to benefit from the California single sales factor election. In accordance with ASC 740 (formerly referred to as SFAS No. 109), we re-measured our deferred tax assets in the first quarter of 2009, taking into account the reversal pattern and the expected California tax rate under the elective single sales factor. As a result of this change, we recorded a decrease to our California deferred tax assets by $0.2 million which resulted in a discrete income tax expense of $0.2 million for the three months ended March 31, 2009.
Other comprehensive income (loss). Other comprehensive income (loss) is the same as net income (loss) for the three and nine months ended September 30, 2009 and 2008.
Segment Information. We manage our business on the basis of one reportable segment. Our products and technologies share similar distribution channels and customers and are sold primarily to hospitals and healthcare facilities to improve patient safety and care and enhance operational efficiency. Our single operating segment is medication and supply dispensing systems. Substantially all of our long-lived assets are located in the United States. For the three and nine months ended September 30, 2009 and 2008, substantially all of our total revenues and gross profits were generated by the medication and supply dispensing systems operating segment from customers in the United States and no one customer accounted for greater than 10% of our revenues.
Subsequent Events. We have evaluated subsequent events, as defined by ASC 855, Subsequent Events (formerly referred to as SFAS No. 165), through November 6, 2009, the day our condensed consolidated financial statements for the third quarter of 2009 were issued and conclude there are no additional disclosures required.
In April 2009, the Financial Accounting Standards Board (FASB) issued three related Staff Positions (FSP): (i) FSP 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability have Significantly Decreased and Identifying Transactions That Are Not Orderly, or FSP FAS 157-4, (ii) FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or FSP FAS 115-2, and (iii) FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, or FSP FAS 107-1, which will be effective for interim and annual periods ending after June 15, 2009. FSP FAS 157-4 provides guidance on how to determine the fair value of assets and liabilities under Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures, in the current economic environment and reemphasizes that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate. FSP FAS 115-2 modifies ASC 320, InvestmentsDebt and Equity Securities, in requirements for recognizing other-than-temporarily impaired debt securities and revises the existing impairment model for such securities, by modifying the current intent and ability indicator in determining whether a debt security is other-than-temporarily impaired. FSP FAS 107-1 enhances the disclosure of instruments under the scope of ASC 825, Financial Instruments, for both interim and annual periods. Our adoption of these Staff Positions did not have a material impact on our consolidated financial statements.
In April 2009, the FASB issued FSP No. 141(R)-1 Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, or FSP FAS 141(R)-1. FSP FAS 141(R)-1 amends the provisions in ASC 805, Business Combinations, for the initial recognition and measurement, subsequent measurement and accounting, and disclosures for assets and liabilities arising from contingencies in business combinations. FSP FAS 141(R)-1 is effective for contingent assets and contingent liabilities acquired in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. We do not expect the adoption of FSP FAS 141(R)-1 will have an impact on our consolidated financial statements unless and until we complete a business combination.
In May 2009, the FASB issued Statement of Financial Accounting Standard, or SFAS, No. 165, Subsequent Events, which was codified as ASC 855, Subsequent Events. ASC 855 requires an entity to disclose the date through which the entity has evaluated subsequent events and whether that evaluation date is the date financial statements are issued (for public entities) or the date the financial statements were available to be issued (for nonpublic entities that do not widely distribute their financial statements). ASC 855 is effective for interim reporting periods ending after June 15, 2009. Our adoption of ASC 855 did not have an impact on our consolidated financial statements.
In June 2009, the FASB issued two SFAS which will become effective for annual reporting periods that begin after November 15, 2009. These are SFAS No. 166, Accounting for Transfers of Financial Assets  an amendment of FASB Statement No. 140, and SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 166 removes the concept of a qualifying special purpose entity from ASC 860, Transfers and Servicing, and requires that a transferor recognize and initially measure at fair value all assets obtained and all liabilities incurred as a result of a transfer of financial assets accounted for as a sale. SFAS No. 167 requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity and requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprises involvement in a variable interest entity. Neither of these new standards has as yet been codified in the new ASC syntax. We do not expect the adoption of either of these financial accounting standards to have an impact on our consolidated financial statements.
In July 2009, the FASB released the final version of its new Accounting Standards Codification (Codification) as the single authoritative source for GAAP. While not intended to change GAAP, the Codification significantly changes the way in which the accounting literature is organized, combining all authoritative standards into a comprehensive, topically organized database. All existing accounting standard documents were superseded and all other accounting literature not included in the Codification is considered nonauthoritative, other than guidance issued by the SEC. The Codification is effective for interim and annual periods ending on or after September 15, 2009. We adopted the Codification in our interim financial statements for the third quarter of fiscal 2009, which had no impact on our financial position, results of operations or cash flows.
In October 2009, the FASB issued Accounting Standards Update, or ASU, 2009-13, which amends ASC Topic 605, Revenue Recognition, to require companies to allocate revenue in multiple-element arrangements based on an elements estimated selling price if vendor-specific or other third-party evidence of value is not available. ASU 2009-13 is effective for fiscal years beginning on or after June 15, 2010. Earlier application is permitted. We are currently evaluating the impact of the adoption of the ASU on our consolidated financial statements.
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 subject to repurchase. Diluted net income (loss) per share is computed by dividing net income (loss) for the period by the weighted average number of shares less shares subject to repurchase plus, if dilutive, potential common stock outstanding during the period. Potential common stock includes the effect of outstanding dilutive stock options, restricted stock awards and restricted stock units computed using the treasury stock method. Since their impact is anti-dilutive, the total number of shares excluded from the calculations of diluted net income (loss) per share for the nine months ended September 30, 2009 and 2008 were 4,332,258 and 1,571,734, respectively.
During 2008, our board of directors authorized stock repurchase programs for the repurchase of up to $90.0 million of our common stock. All repurchased shares were recorded as treasury stock and were accounted for under the cost method. No repurchased shares have been retired. The timing, price and volume of the repurchases have been based on market conditions, relevant securities laws and other factors. The stock repurchase program does not obligate us to repurchase any specific number of shares, and we may terminate or suspend the repurchase program at any time. From the inception of the program in February 2008 through September 30, 2009, we repurchased a total of 4,066,296 shares at an average cost of $16.00 per share through open market purchases.
During the three and nine months ended September 30, 2009, we did not repurchase any shares through the stock repurchase programs. For the three and nine months ended September 30, 2008, we repurchased zero shares and 4,066,296 shares, respectively. As of September 30, 2009, we had $25.0 million of remaining authorized funds to repurchase additional shares under the stock repurchase programs. Additionally, for the three and nine months ended September 30, 2009, we withheld 6,298 shares and 13,220 shares, respectively, from employees to satisfy tax withholding obligations on the vesting of restricted stock units. For the three and nine months ended September 30, 2008, 3,230 shares and 5,390 shares, respectively, were withheld from employees to satisfy tax withholding obligation on the vesting of restricted stock units.
On May 19, 2009 at the Companys 2009 Annual Meeting of Stockholders, or the 2009 Annual Meeting, the Companys stockholders approved the Companys 2009 Equity Incentive Plan, or the 2009 Plan. The 2009 Plan succeeds the Companys 1999 Equity Incentive Plan, as amended, the Companys 2003 Equity Incentive Plan, as amended, and the Companys 2004 Equity Incentive Plan, together the Prior Plans. No additional awards will be granted under any of the Prior Plans; however all outstanding stock awards granted under the Prior Plans continue to be subject to the terms and conditions as set forth in the agreements evidencing such stock awards. At September 30, 2009, 1,519,449 shares of common stock were reserved for future issuance under the 2009 Plan. At September 30, 2009, $9.5 million of total unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted average period of 2.5 years.
We have an Employee Stock Purchase Plan, or ESPP, under which employees can purchase shares of our common stock based on a percentage of their compensation, but not greater than 15% of their earnings, up to a maximum of $25,000 of fair value per year. The purchase price per share must be equal to the lower of 85% of the fair value of the common stock at the beginning of a 24-month offering period or the end of each six-month purchasing period. As of September 30, 2009, 2,508,016 shares had been issued under the ESPP. At the companys 2009 Annual Meeting, the stockholders approved an amendment to the ESPP, which added 2,622,426 shares to the reserve for future issuance. As of September 30, 2009, there were a total of 2,823,539 shares reserved for future issuance under the ESPP. During the nine months ended September 30, 2009, 392,159 shares of common stock were purchased under the ESPP.
We account for share-based awards granted to employees and directors including employee stock option awards, restricted stock and RSUs issued pursuant to the Plans and employee stock purchases made under our ESPP using the estimated grant date fair value method of accounting in accordance with ASC 718, Stock Compensation (formerly referred to as SFAS No. 123(R)).
We value options and ESPP shares using the Black-Scholes-Merton option-pricing model.
(1) A component of other current assets.
(2) Net of allowance for doubtful accounts of $0.4 million as of September 30, 2009 and $0.3 million as of December 31, 2008.
Under ASC 350, Intangibles  Goodwill and Other (formerly referred to as (SFAS No. 142), goodwill and intangibles assets with an indefinite life are not subject to amortization. Rather, we evaluate these assets for impairment at least annually or more frequently if events and changes in circumstances suggest that the carrying amount may not be recoverable.
(2) We purchase components from a variety of suppliers and use contract manufacturers to provide manufacturing services for our products. During the normal course of business, we issue purchase orders with estimates of our requirements several months ahead of the delivery dates. We record a liability for firm, non-cancelable, and unconditional purchase commitments.
On December 11, 2007, we acquired Rioux Vision, Inc., which had an existing lawsuit in progress at the time of that acquisition. Omnicell is now defending that lawsuit, as Rioux Vision is a wholly-owned subsidiary of Omnicell. On October 26, 2006, Rioux Vision was served with a complaint in a lawsuit entitled Flo Healthcare Solutions, LLC v. Rioux Vision, Inc., Case Number 1:06-cv-02600, in the United States District Court for the Northern District of Georgia, alleging claims of patent infringement regarding certain features of the mobile carts sold by Rioux Vision. On December 11, 2008, we were served with a complaint in a lawsuit entitled Flo Healthcare Solutions, LLC v. Omnicell, Inc., Case Number 1:06-cv-02600, in the same Court alleging similar claims of patent infringement regarding Omnicells sale of the mobile carts acquired in the Rioux acquisition. In accordance with ASC 805, Business Combinations, we included a pre-acquisition contingency based on our assessment of its fair value in our preliminary purchase price allocation. The fair value for this pre-acquisition contingency represents the amount we and Rioux agreed to adjust the purchase price as a result of our acceptance of any and all costs and risks relating to this contingency. The pre-acquisition contingency was recorded as an accrued liability as of the acquisition date and is recorded as of September 30, 2009. While we cannot predict the outcome of this matter, there can be no assurance should an unfavorable outcome arise, that such outcome would not have a material adverse effect on our financial position, results of operations or cash flows.
On March 4, 2009, we filed, but did not serve, a complaint against Flo Healthcare Solutions, LLC, or Flo, entitled Omnicell, Inc. v. Flo Healthcare Solutions LLC, Case Number C09 00923, in the United States District Court for the Northern District of California, with respect to the infringement of Omnicells U.S. Patent Number 6,604,019. Flo has received a courtesy copy of the complaint. On March 10, 2009, we consented to a motion that Flo filed requesting a stay of the Flo Healthcare Solutions LLC v. Rioux Vision, Inc. lawsuit pending the final outcome, including all appeals, of the inter parties reexamination of U.S. Patent No. 6,721,178, currently before the United States Patent and Trademark Office, or the Reexamination, which was granted. We consented to a similar motion filed by Flo with respect to the stay of the Flo Healthcare Solutions LLC v. Omnicell, Inc. lawsuit, which was also granted. Under a tolling agreement between the parties, we agreed to dismiss without prejudice the Omnicell, Inc. v. Flo Healthcare Solutions LLC lawsuit, and Omnicell and Flo agreed to toll further actions under all three lawsuits pending the final outcome, including all appeals, of the Reexamination. We are awaiting a response from the United States Patent and Trademark Office following the initial filing of appeal briefs.
On July 8, 2009, Medacist Solutions Group LLC filed a complaint against Omnicell in U.S. District Court in the Southern District of New York, entitled Medacist Solutions Group LLC v. Omnicell, Inc., case number 09 CV 6128, alleging infringement of Medacist U.S. Patent Number 6,842,736. The complaint also alleges, among other claims, that Omnicell breached the terms of a nondisclosure agreement it had entered into with Medacist, or the NDA, and that Omnicell misappropriated Medacist trade secrets and confidential information in violation of the NDA. We have responded to the complaint and intend to defend the matter vigorously.
As required under ASC 450, Contingencies, we accrue for contingencies when we believe that a loss is probable and that we can reasonably estimate the amount of any such loss. We have made an assessment of the probability of incurring any such losses and such amounts are reflected in accrued liabilities in our condensed consolidated financial statements. Except as otherwise indicated above, the outcomes in these matters are not probable or reasonably estimable. We believe that we have valid defenses with respect to legal matters pending against us. However, litigation is inherently unpredictable, and it is possible that cash flows or results of operations could be materially affected in any particular period by the unfavorable resolution of one or more of these contingencies or because of the diversion of managements attention and the creation of significant expenses.
During the first quarter of 2009, we implemented a restructuring plan whereby we reduced our headcount from 844 full-time employees at December 31, 2008 to 756 full-time employees at March 31, 2009 to balance our expenses with our current business expectations. The restructuring plan accounted for a reduction in 103 employees, which was partially offset by hiring for newly created positions during the quarter. Affected employees were eligible for a severance package that included severance pay, continuation of benefits and outplacement services. We recorded a charge of $2.5 million in the first quarter of 2009 in connection with the restructuring. We do not expect to incur any additional charges associated with this restructuring beyond the first quarter of 2009 and we expect to pay substantially all of the accrued severance costs by the end of 2009.
· 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, may, plans, potential, predicts, projects, should, will, would and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events, are based on assumptions, and are subject to risks and uncertainties. We discuss many of these risks in this Quarterly Report on Form 10-Q in greater detail in Part II  Section 1A. Risk Factors below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Also, forward-looking statements represent our estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. You should also read our Annual Report on Form 10-K and the documents that we reference in the Annual Report on Form 10-K and have filed as exhibits, completely and with the understanding that our actual future results may be materially different from what we expect. All references in this report to Omnicell, Inc., Omnicell, our, us, we or the Company collectively refer to Omnicell, Inc., a Delaware corporation, and its subsidiaries.
Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
We were incorporated in California in 1992 under the name Omnicell Technologies, Inc. and reincorporated in Delaware in 2001 as Omnicell, Inc. We are a leading provider of medication control and patient safety solutions for acute care health facilities. Over 1,300 hospitals have installed our automated hardware/software solutions for controlling, dispensing, acquiring, verifying and tracking medications and medical and surgical supplies. We have designed our products to enable healthcare professionals to improve patient safety through reduced medication errors, and improved administrative controls and medical safety, while simultaneously improving workflow and increasing operational efficiency. Our products are designed to allow nurses, pharmacists and other clinicians to spend more time on patient care while at the same time providing confirmation that the right patients are receiving the right medication, at the right time, in the right dose, via the right route.
We sell our medication dispensing and supply automation systems, and generate the substantial majority of our revenue, in the United States. However, we have seen an increase in our revenue from our international operations and we expect such revenue from our international operations to increase in future periods as we continue to grow our international business. Our sales force is organized by geographic region in the United States and Canada. We also sell through distributors in Asia, Australia, Europe, and South America. Omnicell has not sold in the past, and has no future plans to sell its products either directly or indirectly to customers located in countries that are identified as state sponsors of terrorism by the U.S. Department of State, and are subject to economic sanctions and export controls.
We operate in one business segment, the design, manufacturing, selling and servicing of medication and supply dispensing systems. Our management team evaluates our performance based on company-wide, consolidated results. In general, we recognize revenue when our medication dispensing and supply automation systems are installed. Installation generally takes place two weeks to twelve months after our systems are ordered. The installation process at our customers sites includes internal procedures associated with large capital expenditures and additional time associated with adopting new technologies. Given the length of time necessary for our customers to plan for and complete their acceptance of the installation of our systems, our focus is on shipping products based on the installation dates requested by our customers and working at our customers pace. The amount of revenue recognized in future periods may depend on, among other things, the terms and timing of lease contract renewals, additional product sales and the size of such transactions. We believe that future revenue will be affected by the competitiveness of our products and services.
· The market environment of increased patient safety awareness and increased regulatory control has driven our solutions to be a high priority in customers capital budgets.
During the first quarter of 2009, we instituted a restructuring plan whereby we reduced our headcount from 844 full-time employees at December 31, 2008 to 756 full-time employees at March 31, 2009 to balance our expenses with the reduced sales and installations volume. The restructuring plan accounted for a reduction of 103 regular and temporary employees, which was partially offset by hiring for newly created positions during that quarter. Our ability to grow revenue and maintain positive cash flow is dependent on our ability to continue to receive orders from customers, the volume of installations we are able to complete, our ability to meet customers needs and provide a quality installation experience and our flexibility in manpower allocations among customers to complete installations on a timely basis.
During the third quarter of 2009 we achieved similar performance levels compared to the second quarter of 2009. Both product and service revenues increased compared to the prior quarter, by 2.1% and 4.2% respectively. Although product gross margins declined by 1.0 margin point compared to the prior quarter, mainly due to a higher proportion of lower margin international business, service margins improved by 4.4 margin points due to a growth in service revenues while service costs remained relatively flat. Cash collections were relatively strong during the quarter as compared to the prior quarter, which contributed to a reduction in our trade accounts receivables of $8.9 million, reversing a trend from prior quarters and improving our cash position by $19.9 million compared to the prior quarter. Net cash provided by operating activities totaled $24.3 million during the nine months ended September 30, 2009. Our ability to grow revenue and maintain positive cash flow is dependent on our ability to continue to receive orders from customers, the volume of installations we are able to complete, our ability to meet customers needs and provide a quality installation experience, managing our cost structure and our flexibility in manpower allocations among customers to complete installations on a timely basis.
Our overall gross margin declined to 50.5% for the quarter ended September 30, 2009 as compared to 50.9% for the quarter ended September 30, 2008, primarily due to the absorption of fixed costs over a smaller revenue base and a higher mix of international business. International business carries lower gross margins because our international distributors bear the cost of installation, support and most of the sales effort, and therefore demand lower pricing. We believe that our gross margins will continue to fluctuate based on the mix of products installed, fluctuation in the percentage of revenues derived from our international business and the related costs and changes in sales and installation headcount compared to our revenue level.
We maintain a development staff with expertise in hospital logistics and computerized automated solutions that allows us to regularly deliver new innovations to the market. During the first quarter of 2009, we introduced the Omnicell Tissue Center system which is designed to enable surgical personnel to keep tissue specimens secure, including procurement, processing and preserving of the tissue and also to maintain detailed history records. During the third quarter of 2009, we introduced Omnicell 14.0, which we believe provides our customers enhanced operating room anesthesia solutions and introduces our new proprietary Anywhere RN technology, which is designed to allow Omnicell cabinet transactions to be managed by nurses from virtually any workstation in the hospital, and result in time savings and increased efficiency in medication management. We believe these new products coupled with enhancements to products we intend to deliver in the future, along with other patient safety and clinical workflow solutions, will continue to help differentiate us in the marketplace.
· Accounting for income taxes.
During the nine months ended September 30, 2009, there were no significant changes in our critical accounting policies and estimates. Please refer to Managements Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2008 for a more complete discussion of our critical accounting policies and estimates.
Product revenues decreased $11.4 million, or (21.1%) in the three months ended September 30, 2009 as compared to the same period in 2008. Product revenues decreased $32.3 million, or (20.3%) in the nine months ended September 30, 2009 as compared to the same period in 2008. The decrease in product revenue for the three and nine months ended September 30, 2009 was primarily due to a decrease in the number of installations of medication and supply automation systems and central pharmacy products, from both existing and new customers in our U.S. domestic markets. This decrease was in part offset by an increase in revenues from our international business for the nine months ended September 30, 2009 compared to the same period in 2008. This net decrease in product revenue year over year reflects the current economic downturn and the resulting capital investment constraints and longer sales cycle by our customers.
Cost of product revenues decreased by $4.8 million, or (19.5%) in the three months ended September 30, 2009 as compared to the same period in 2008. The decrease was primarily due to the reduction in product revenue resulting in a $4.0 million decrease in direct material cost and a decrease in our spending of $0.8 million, primarily from lower headcount and associated headcount related expenses such as travel. Cost of product revenues decreased $13.7 million, or (18.7%), in the nine months ended September 30, 2009 compared to the corresponding period in 2008. The decrease was due to both a reduction in product revenue, resulting in a $11.0 million decrease in direct material cost, and a decrease in our spending of $2.7 million, primarily from lower headcount and associated headcount related expenses such as travel.
The cost reductions in the nine months ended September 30, 2009 were partially offset by restructuring charges of $1.0 million relating to our work force reduction during the first quarter of 2009, which lowered headcount by 50 employees, predominately in the manufacturing and field operations departments. Restructuring costs recorded in the first quarter of 2009 related primarily to severance pay, continuation of benefits and outplacement services.
Gross profit on product revenue decreased by $6.5 million, or (22.4%) in the three months ended September 30, 2009 as compared to the same period in 2008. Gross profit on product revenue decreased by $19.6 million, or (22.8%) in the nine months ended September 30, 2009 as compared to the same period in 2008. The decrease in gross profit on product revenues was primarily a result of lower product revenues and restructuring charges related to our work force reduction, offset by lower direct material costs and lower headcount and travel costs.
Service and other revenues include revenues from service and maintenance contracts and rentals of automation systems. Service and other revenues increased by $1.1 million, or 10.5% in the three months ended September 30, 2009 as compared to the same period in 2008. Service and other revenues increased by $1.4 million, or 4.5% in the nine months ended September 30, 2009 as compared to the same period in 2008. The increases in service and other revenues for the three and nine months ended September 30, 2009 was primarily the result of an expansion in our installed base of automation systems and a resulting increase in the number of support service contracts.
Cost of service and other revenues decreased by $0.02 million, or (0.3%) in the three months ended September 30, 2009 as compared to the same period in 2008. The decrease was primarily due to a $0.04 million decrease in labor and support costs offset by $0.02 million increase in material costs. Cost of service and other revenues increased by $0.9 million, or 5.1% in the nine months ended September 30, 2009 as compared to the same period in 2008. The increase was primarily due to $0.2 million increase in labor costs in support of the expanded service base, a $0.8 million increase in materials costs associated with increased volumes, and a $0.2 million restructuring charges relating the our workforce reduction during the first quarter of 2009.
Gross profit on service and other revenues increased by $1.1 million, or 31.5% in the three months ended September 30, 2009 as compared to the same period in 2008. Gross profit on service and other revenues increased by $0.2 million, or 1.6% in the nine months ended September 30, 2009 as compared to the same period in 2008. The increase in gross margin on service and other revenues for the three and nine months ended September 30, 2008 was due primarily to increased revenue from an expanded installed base without a significant growth in service costs.
Research and Development. Research and development expenses increased by $0.3 million, or 6.3% in the three months ended September 30, 2009 as compared to the same period in 2008. Research and development expenses represented 9.3% and 7.3% of total revenues in the three months ended September 30, 2009 and 2008, respectively. The increase was due primarily to less capitalization of software development costs incurred subsequent to reaching technological feasibility. Research and development expenses decreased by $0.4 million, or 2.9% in the nine months ended September 30, 2009 as compared to the same period in 2008. Research and development expenses represented 8.5% and 7.3% of total revenues in the nine months ended September 30, 2009 and 2008 respectively. The decrease was due primarily to a $1.1 million increase in the amount of capitalized software development costs, offset by higher outside project service costs of $0.8 million.
Selling, General and Administrative. Selling, general and administrative expenses decreased by $2.5 million, or 10.6% in the three months ended September 30, 2009 as compared to the same period in 2008. Selling, general and administrative expenses represented 39.5% and 37.0% of total revenues in the three months ended September 30, 2009 and 2008, respectively. Selling, general and administrative expenses decreased by $6.1 million, or 8.7% in the nine months ended September 30, 2009 as compared to the same periods in 2008. Selling, general and administrative expenses represented 40.2% and 36.9% of total revenues in the three months ended September 30, 2009 and 2008, respectively. In the nine months ended September 30, 2009, the decrease in selling, general and administrative expenses was primarily due to the restructuring which lowered our headcount related expenses, a decrease of bad debt expense of $0.7 million, a decrease in Group Purchasing Organization fees of $1.0 million and a decrease in freight expense of $0.8 million, each of which is associated with lower sales volume.
We expect selling, general and administrative expenses to stabilize in absolute dollars as we believe that we have aligned our cost structure to the current economic and market environments and product sales volumes.
Restructuring charges. In the first quarter of 2009, we recorded a $1.3 million charge related to our work force reduction. There was no corresponding charge during 2008. As part of our restructuring, we reduced our headcount by 12 employees in research and development, and 31 employees in selling, general and administrative positions. Costs recorded related primarily to severance pay, continuation of benefits and outplacement services. We saw the benefit from our lowered cost structure in the three months ended September 30, 2009 and expect to continue to operate for the rest of the year at close to our revised headcount level. We do not expect to incur any additional charges associated with this restructuring and we expect to pay substantially all of the accrued severance costs by the end of 2009.
For the three and nine months ended September 30, 2009, we recorded an income tax expense of $0.1 million and a benefit of $0.2 million, respectively, as compared with an income tax expense of $2 million and $7 million for the corresponding periods in 2008. The effective tax rate for the three and nine months ended September 30, 2009 was 14.6% and 59.5% as compared to effective tax rates of 40.4% and 42.6% for the corresponding periods in 2008. The decrease in the effective tax rate for the three months ended September 30, 2009 as compared to the corresponding periods in 2008 is due to a $0.3 million change in estimate relating to our prior years provision for income taxes. The increase of the effective tax rate for the nine months ended September 30, 2009 as compared to the corresponding period in 2008 is due mostly to the re-measurement of the California deferred tax assets as discussed below. The estimated annual tax rate differs from the statutory tax rate of 35% primarily due to the impact of state income taxes and statutory stock compensation options charges under ASC 718 (formerly referred to as SFAS No. 123(R)), partially offset by the benefit from research and development tax credits.
We had cash and cash equivalents of $146.3 million at September 30, 2009, as compared to $120.4 million at December 31, 2008. All of our cash is in low risk short term money market funds or demand deposits. We have no long term investments. We believe our current cash and cash equivalent balances and cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next twelve months.
Operating activities provided $24.3 million of cash during the nine months ended September 30, 2009, as compared to $20.5 million for the nine months ended September 30, 2008. The two primary differences in cash generated from operations between 2009 and 2008 were lower net income in 2009 of $9.5 million, offset by less cash consumed by accounts receivable of $10.3 million. Accounts receivable balances grew by $11.2 million during the first nine months of 2008 reflecting higher revenues during this period, whereas accounts receivable balances for the same period in 2009 grew by only $0.9 million in line with relatively flat revenues. Other factors contributing to the increase in operating cash flow were higher accrued liabilities and deferred service revenue and lower other current assets.
We used $2.2 million of cash for investing activities during the nine months ended September 30, 2009, a decrease from $8.7 million for the nine months ended September 30, 2008. The decrease was primarily due to lower spending to support our information technology infrastructure as the implementation of our new enterprise accounting system is substantially complete.
Cash generated in financing activities was $3.7 million during the nine months ended September 30, 2009, as compared to $56.5 million in cash used during the nine months ended September 30, 2008. The cash generated during the nine months ended September 30, 2009 was from exercises of stock options and sales of our common stock under our ESPP. The net cash used in the corresponding period in 2008 was primarily for the repurchase of shares of our common stock with an aggregate value of $65.0 million, plus brokerage fees, offset by proceeds from exercises of stock options and sales of our common stock under our ESPP.
There have been no material changes to our contractual obligations during the three months ended September 30, 2009. Please refer to our Annual Report on Form 10-K for the year ended December 31, 2008 for a description of our facility leases and contractual obligations and the Notes to the consolidated financial statements included therein.
As of September 30, 2009, we had no off-balance sheet arrangements as defined under Regulation S-K 303(a)(4) of the Securities Exchange Act of 1934, as amended, and the instructions thereto.
As of September 30, 2009, there were no material changes to our disclosures to market risk from the disclosures set forth under the caption, Quantitative and Qualitative Disclosures About Market Risk in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2008.
Our management, with the participation of our principal executive officer and principal financial officer has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of September 30, 2009. Based on such evaluation, our principal executive officer and principal financial officer have concluded that, as of September 30, 2009, our disclosure controls and procedures were effective.
There were no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the three months ended September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On March 4, 2009, we filed, but did not serve, a complaint against Healthcare Solutions, or Flo, entitled Omnicell, Inc. v. Flo Healthcare Solutions LLC, Case Number C09 00923, in the United States District Court for the Northern District of California, with respect to the infringement of Omnicells U.S. Patent Number 6,604,019. Flo has received a courtesy copy of the complaint. On March 10, 2009, we consented to a motion that Flo filed requesting a stay of the Flo Healthcare Solutions LLC v. Rioux Vision, Inc. lawsuit pending the final outcome, including all appeals, of the inter parties reexamination of U.S. Patent No. 6,721,178, currently before the United States Patent and Trademark Office or the Reexamination, which was granted. We consented to a similar motion filed by Flo with respect to the stay of the Flo Healthcare Solutions LLC v. Omnicell, Inc. lawsuit, which was also granted. Under a tolling agreement between the parties, we agreed to dismiss without prejudice the Omnicell, Inc. v. Flo Healthcare Solutions LLC lawsuit, and Omnicell and Flo agreed to toll further actions under all three lawsuits pending the final outcome, including all appeals, of the Reexamination. The parties are awaiting a response from the United States Patent and Trademark Office following the initial filing of appeal briefs.
On July 8, 2009, Medacist Solutions Group LLC filed a complaint against Omnicell in U.S. District Court in the Southern District of New York, entitled Medacist Solutions Group LLC v. Omnicell, Inc., case number 09 CV 6128, alleging infringement of Medacist U.S. Patent Number 6,842,736. The complaint also, among other claims, alleges that Omnicell breached the terms of a nondisclosure agreement it had entered into with Medacist, or the NDA, and that Omnicell misappropriated Medacist trade secrets and confidential information in violation of the NDA. Omnicell has responded to the complaint and intends to defend the matter vigorously.
We have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition or results of operations. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may also significantly impair our business operations. If any of these risks occur, our business, results of operations or financial condition could suffer and the market price of our common stock could decline. We have marked with an asterisk (*) those risk factors below that reflect substantive changes from the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2008, filed with the Securities and Exchange Commission on February 24, 2009.
Automed), Talyst, Cerner Corporation, Emerson Electronic Co. (through its acquisitions of Flo Healthcare LLC, Lionville Systems, Inc. and medDispense), Stinger Medical, InfoLogix, Inc. Ergotron, Inc., Artromick International, Inc., and Rubbermaid Medical Solutions (a business unit of Newell Rubbermaid Inc).
· our competitors may secure products and services from suppliers on more favorable terms or secure exclusive arrangements with suppliers or buyers that may impede the sales of our products and services.
Competitive pressures could result in increased price competition for our products and services, fewer customer orders and reduced gross margins, any of which could harm our business.
Changing customer requirements could decrease the demand for our products and services.
The medication management and supply chain solutions market is characterized by evolving technologies and industry standards, frequent new product introductions and dynamic customer requirements that may render existing products obsolete or less competitive. As a result, our position in the medication management and supply chain solutions market could erode rapidly due to unforeseen changes in the features and functions of competing products, as well as the pricing models for such products. Our future success will depend in part upon our ability to enhance our existing products and services and to develop and introduce new products and services to meet changing customer requirements. The process of developing products and services such as those we offer is extremely complex and is expected to become increasingly more complex and expensive in the future as new technologies are introduced. If we are unable to enhance our existing products or develop new products to meet changing customer requirements, demand for our products could decrease.
Our operating results have been and may continue to be adversely affected by unfavorable global economic and market conditions, foreign exchange fluctuations, as well as a lessening demand in the capital equipment and information system markets. Customer demand for our products is significantly linked to the strength of the economy. The continued reduction in demand for capital equipment and information systems caused by weak economic conditions and decreased corporate and government spending, deferrals or delays of capital equipment and information system projects, longer time frames for capital equipment and information system purchasing decisions and generally reduced expenditures for capital and information systems solutions will result in decreased revenues and lower revenue growth rates for us and our operating results could be materially and adversely affected.
Additionally, the U.S. Federal government continues to propose legislation designed to reduce the overall cost of healthcare, these proposals and ongoing discussions taking place at the Federal level with regard to healthcare reform may have an impact on our business. Healthcare facilities may decide to postpone or scale back spending until the implications of any healthcare reform legislation are more clearly understood, which may affect the demand for our products and harm our business.
purchases or leases of our products from third-parties, demand for our products could decline and we may be required to extend credit to certain customers, which would negatively impact our cash balances and increase the risk of collections, in order to sell our products.
Any reduction in the demand for or adoption of our medication and supply dispensing systems and related services would reduce our revenues.
Our medication and supply dispensing systems represent only one approach to managing the distribution of pharmaceuticals and supplies at healthcare facilities. Healthcare facilities still use traditional approaches that do not include automated methods of medication and supply dispensing management. As a result, we must continuously educate existing and prospective customers about the advantages of our products, which requires significant sales efforts and can cause longer sales cycles. Despite our significant efforts and extensive time commitments in sales to healthcare facilities, we cannot be assured that our efforts will result in sales to these customers.
In addition, our medication and supply dispensing systems typically represent a sizeable initial capital expenditure for healthcare organizations. Changes in the budgets of these organizations and the timing of spending under these budgets can have a significant effect on the demand for our medication and supply dispensing systems and related services. These budgets are often supported by cash flows that can be negatively affected by declining investment income, and influenced by limited resources, increased operational and financing costs, macroeconomic conditions such as unemployment rates and conflicting spending priorities among different departments. Any decrease in expenditures by healthcare facilities could decrease demand for our medication and supply dispensing systems and related services and reduce our revenues.
Our current and potential customers may have other business relationships with our competitors and consider those relationships when deciding between our products and services and those of our competitors.
Many of our competitors are large companies that sell a variety of products and services into the healthcare market to our current and potential customers and may be better positioned to sell products with similar functionality. As a result, if a potential customer is a customer of one of these competitors, the customer may be motivated to purchase medication and supply dispensing systems or other automation solutions from our competitor in order to maintain or enhance their business relationship with that competitor, regardless of the products performance or capabilities.
If we experience delays in or loss of sales of, delays in installations of, or delays in the recognition of revenue associated with our medication and supply dispensing systems, our competitive position, results of operations and financial condition could be harmed.
The purchase of our medication and supply dispensing systems is often part of a customers larger initiative to re-engineer its pharmacy, distribution and materials management systems and as a result, our sales cycles are often lengthy. The purchase of our medication and supply dispensing systems often entail larger strategic purchases by customers that frequently require more complex and stringent contractual requirements and generally involves a significant commitment of management attention and resources by prospective customers. These larger and more complex transactions often require the input and approval of many decision-makers, including pharmacy directors, materials managers, nurse managers, financial managers, information systems managers, administrators, lawyers and boards of directors. For these and other reasons, the sales cycle associated with the sale of our medication and supply dispensing systems is often lengthy and subject to a number of delays over which we have little or no control. A delay in, or loss of, sales of our medication and supply dispensing systems could have an adverse affect upon our operating results and could harm our business.
In addition, and in part as a result of the complexities inherent in larger transactions, the average time between the purchase and installation of our systems has increased over the past few years for reasons that are often outside of our control. Since we recognize revenue only upon installation of our systems at a customers site, any delay in installation by our customers also causes a delay in the recognition of revenue for that system.
Complications in connection with our current business information system initiative may impact our results of operations, financial condition and cash flows.
We replaced our enterprise-level business information system with a new enterprise resource planning system in January 2009. This conversion resulted in changes to the tools we use to take orders, procure materials, manage inventories, schedule production, remit billings, collect cash, make payments and perform other business functions. Based upon the complexity of this initiative, there is risk that we will not see the expected benefit from the implementation of this new system in accordance with its anticipated timeline and will incur additional costs. The implementation could result in operating inefficiencies and financial reporting delays, and the implementation could impact our ability to perform necessary business transactions. All of these risks could adversely impact our results of operations, financial condition and cash flows.
Our revenue declined by 16.1% in the quarter ended September 30, 2009 compared to the corresponding period in 2008. Our revenues grew by 18.2% and 37.7% in fiscal 2008 and 2007, respectively. Current macroeconomic and general market conditions have contributed to a decline in our revenue recently. Our ability to manage rapid reductions in our revenue and achieve or sustain profitability is dependent upon our ability to manage costs and control expenses. If macroeconomic and general market conditions improve and return to historical levels, our ability to grow revenue profitably will also be dependent on our ability to continue to manage costs and control expenses. If our revenue increases rapidly, we may not be able to manage this growth effectively. Management of future growth is dependent on our ability to continue to receive orders from customers, the volume of installations we are able to complete, our ability to continue to meet our customers needs and provide a quality installation experience and our flexibility in manpower allocations among customers to complete installations on a timely basis.
Our expense control is dependent on our ability to continue to develop and leverage effective and efficient human and information technology systems, our assumptions regarding our reorganization of personnel and financial resources, our ability to gain efficiencies in our workforce through the local and worldwide labor markets and our ability to grow our outsourced vendor supply model. Our expense growth rate may equal or exceed our revenue growth rate if we are unable to streamline our operations, or fail to reduce the costs or increase the margins of our products. In addition, we may not be able to reduce our expenses to keep pace with a reduction in our revenue, which could harm our results of operations and financial position.
If we are unable to recruit and retain skilled and motivated personnel, our competitive position, results of operations and financial condition could be harmed.
Our success is highly dependent upon the continuing contributions of our key management, sales, technical and engineering staff. We believe that our future success will depend upon our ability to attract, train and retain highly skilled and motivated personnel. As more of our products are installed in increasingly complex environments, greater technical expertise will be required. As our installed base of customers increases, we will also face additional demands on our customer service and support personnel, requiring additional resources to meet these demands. We may experience difficulty in recruiting qualified personnel. Competition for qualified technical, engineering, managerial, sales, marketing, financial reporting and other personnel can be intense and we cannot assure you that we will be successful in attracting and retaining qualified personnel. Competitors have in the past attempted, and may in the future attempt, to recruit our employees.
In addition, we have historically used stock options and other forms of equity compensation as key components of our employee compensation program in order to align employees interests with the interests of our stockholders, encourage employee retention and provide competitive compensation packages. The affect of managing share-based compensation expense may make it less favorable for us to grant stock options to employees in the future. If employees believe that the incentives that they would receive under any modified strategy are less attractive, we may find it difficult to attract, retain and motivate employees. Failure to attract and retain key personnel could harm our competitive position, results of operations and financial condition.
We may not be able to successfully integrate acquired businesses or technologies into our existing business, which could negatively impact our operating results.
· failure to understand and compete effectively in markets in which we have limited previous experience.
The healthcare industry faces financial constraints and consolidation that could adversely affect the demand for our products and services.
capital and operating budgets. To the extent healthcare spending declines or increases more slowly than we anticipate, demand for our products and services could decline.
Many healthcare providers have consolidated to create larger healthcare delivery organizations to achieve greater market power. If this consolidation continues, it could reduce the number of our target customers. In addition, the resulting organizations could have greater bargaining power, which may lead to price erosion.
We have contracts with various group purchasing organizations, such as AmeriNet, Inc., Broadlane, Inc., HealthTrust Purchasing Group, L.P., MAGNET Group, MedAssets Supply Chain Systems, LLC., Novation, LLC, and Premier, Inc., which enable us to more readily sell our products and services to customers represented by these organizations. Some of our contracts with these organizations are terminable at the convenience of either party. The loss of any of these relationships could impact the breadth of our customer base and could impair our ability to increase our revenues. We cannot assure you that these organizations will renew our contracts on similar terms, if at all, and they may choose to terminate our contracts before they expire.
· volatility in our stock price and its effect on share-based compensation expense.
Due to all of these factors, our quarterly revenues and operating results are difficult to predict and may fluctuate, which in turn may cause the market price of our stock to decline.
· general economic and market conditions.

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