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Business Acquisition
12 Months Ended
Dec. 31, 2012
Business Acquisition [Abstract]  
Business Combination Disclosure [Text Block]
Business Acquisition
MTS Medication Technologies, Inc.
On May 21, 2012, we completed our acquisition of MedPak Holdings, Inc. ("MedPak") pursuant to an Agreement and Plan of Merger (the "Merger Agreement") under which Mercury Acquisition Corp, a newly formed Omnicell subsidiary, was merged with and into MedPak, with MedPak surviving the merger as a wholly-owned subsidiary of Omnicell. MedPak is the parent company of MTS Medication Technologies, Inc. ("MTS").
The MTS acquisition primarily was to align Omnicell with the long term trends of the healthcare market to manage the health of patients across the continuum of care. We can now better serve both the acute care and non-acute care markets. Omnicell and MTS bring capabilities to each other that strengthen the product lines and expand the medication management coverage of both companies.
We are accounting for the transaction under the acquisition method of accounting in accordance with the provisions of FASB ASC Topic 805, Business Combinations. Under the acquisition method, the estimated fair value of the consideration transferred to purchase the acquired company is allocated to the assets acquired and the liabilities assumed based on their fair values. We have made significant estimates and assumptions in determining the allocation of the acquisition consideration.
Pursuant to the terms of the Merger Agreement, we paid approximately $158.3 million in cash after adjustments provided for in the Merger Agreement, of which approximately $13.5 million was placed in an escrow fund, which will be distributed to MedPak's stockholders (subject to claims that we may make against the escrow fund for indemnification and other claims following the closing). The revised acquisition consideration of $158.3 million is comprised entirely of cash at closing.
At date of acquisition, we also recorded a $1.8 million liability based on expected additional working capital adjustments. In October 2012, a portion of the escrow fund set aside for the working capital adjustment was disbursed, with Omnicell receiving $0.3 million and MedPak's former stockholders receiving the remainder. As of December 31, 2012, the working capital adjustment was reversed, with a resulting reduction in goodwill of $1.8 million and a corresponding reduction in accrued liabilities. Accounts receivable acquired were recorded at their estimated fair value, comprised of total contractual obligations due of $7.6 million, of which $0.2 million was not expected to be collected. Based on an acquisition date valuation, the preliminary estimated fair values of acquired inventory and property and equipment exceeded their historical carrying values. We recorded a preliminary step-up to the estimated fair value of acquired inventory in the amount of $1.6 million, which resulted in subsequent related charges of $1.6 million to cost of product revenues.
In the fourth quarter of 2012, subsequent to the initial acquisition price allocation, we revised our preliminary determination of the fair value of fixed assets and intangible assets acquired from MTS, resulting in a decrease in the carrying value of acquired fixed assets of $1.3 million, and increase in the carrying value of intangibles of $0.4 million and a net increase in recorded goodwill of $0.9 million.
The total consideration and the allocation of the consideration to the individual net assets is considered preliminary as there are remaining uncertainties to be resolved, including the completion of an analysis of potential contingent payroll tax withholding obligations.
The total revised acquisition price was approximately $158.3 million and the preliminary allocation is comprised of the following (in thousands):
 
 
Fair value acquired

 
Cash including restricted cash
 
$
2,000

 
Accounts receivable
 
7,403

 
Inventory
 
11,726

 
Deferred tax assets and other current assets
 
2,894

 
      Total current assets
 
24,023

 
Property and equipment
 
9,807

 
Intangible assets
 
83,900

 
Goodwill
 
82,864

 
Other non-current assets
 
244

 
      Total assets
 
200,838

 
Current liabilities
 
(7,917
)
 
Non-current deferred tax liabilities
 
(33,386
)
 
Other non-current liabilities
 
(1,223
)
 
      Net assets acquired
 
$
158,312

 
 
 
 
 
      Cash consideration, fair value
 
$
158,312

 
 
 
 
 

Identifiable intangible assets. Acquired technology relates to MTS’ products across all of its product lines that have reached technological feasibility, primarily the OnDemand technology. Trade name is primarily related to the MTS and OnDemand brand names. Customer relationships represent existing contracted relationships with pharmacies, institutional care facilities and others. Acquired technology, customer relationships, and trade names will be amortized on a straight-line basis over their estimated useful lives, which range from 12 to 30 years.
The estimated fair values of the acquired technology, trade names and customer relationships were primarily determined using either the relief-from-royalty or excess earnings methods. The interest rates utilized to discount net cash flows to their present values were determined after consideration of the overall enterprise rate of return and the relative risk and importance of the assets to the generation of future cash flows.
For income tax purposes, the historical tax bases of the acquired assets and assumed liabilities, along with the tax attributes of the MTS companies, will carry over. Because the transaction was a cash-for-stock transaction, there is no tax basis in the newly acquired intangible assets. Accordingly, the acquisition accounting includes the establishment of net deferred tax liabilities of $33.4 million, resulting from book tax basis differences related to the intangible assets acquired, as well as to the step up in the value of fixed assets and inventory to their estimated fair values at the time of acquisition.
Goodwill. Approximately $82.9 million has been allocated to goodwill. Goodwill represents the excess of the fair value of the consideration transferred over the fair value of the underlying net tangible and identifiable intangible assets on the acquisition date. In accordance with ASC Topic 350, Intangibles - Goodwill and Other, goodwill will not be amortized, but instead will be tested for impairment at least annually or more frequently if certain indicators are present. We believe the MTS acquisition enhances our offerings and diversifies our revenue mix, providing a more robust product and service solution to our current customers while expanding Omnicell’s international presence. We consider these factors as supporting the amount of goodwill recorded.
Details of acquired intangibles are as follows (in thousands, except for years):
 
 
Fair value acquired

 
Useful Life (years)
 
First year amortization expense

 
Trade name
 
$
6,800

 
12
 
$
567

 
Customer relationships
 
50,500

 
 28 to 30
 
1,707

 
Acquired technology
 
26,600

 
20
 
1,330

 
Intangibles acquired
 
$
83,900

 
 
 
$
3,604

 
 
 
 
 
 
 
 
 
Weighted average life of intangibles
 
 
 
25.14
 
 
 
 
 
 
 
 
 
 
 


For the year ended December 31, 2012, we incurred approximately $3.2 million in acquisition-related costs in connection with the MTS acquisition. These costs are included primarily in selling, general and administrative expenses on our Consolidated Statement of Operations.
During the year ended December 31, 2012, the acquired MTS operations (consolidated since the May 21, 2012 acquisition date) generated revenue of approximately $47.2 million and net income of $2.9 million.    
The following represents unaudited pro forma revenue and net income as if MTS had been included in our consolidated results from January 1, 2011 (in thousands):
 
Year Ended December 31,
 
 
2012
 
2011
 
Revenues
$
342,770

 
$
320,771

 
Net income
$
19,030

 
$
14,842

 
 
 
 
 
 


The pro forma unaudited condensed consolidated operating results presented above were calculated after applying Omnicell's accounting policies and by adding together the historical operating statements of MTS and Omnicell, with certain adjustments, assuming an acquisition date of January 1, 2011. Based on the estimated fair values and useful lives determined from the allocation of total MTS acquisition consideration, MTS historical depreciation and amortization expense was replaced with acquisition-accounting depreciation and amortization expense. Also reflected is the interest expense elimination effect of MTS on its debt (since it would have been paid off at acquisition) and the elimination of certain management fees to an affiliated party, offset in part by interest income foregone by Omnicell, by no longer having the acquisition consideration available as interest-bearing cash, cash equivalents and short-term investments.
The pro forma operating results do not include actual direct acquisition-related expenses incurred by MTS and Omnicell as such amounts are considered nonrecurring. The total of all adjustments were tax effected using an estimated federal and state effective income tax rate.
The pro forma operating results do not include any assumption of operating synergies for the combined companies. These pro forma results are provided as required disclosures and should not be considered as a forecast for any future period, nor as representing what the actual operating results would have been if the acquisition, in fact, had occurred on January 1, 2011.
Pandora Data Systems, Inc.
On September 29, 2010, we completed the acquisition of all of the outstanding capital stock of Pandora Data Systems, Inc. ("Pandora"), a provider of analytical software for medication diversion detection and regulatory compliance, for $6.0 million in cash.
In connection with the acquisition, we recorded $3.6 million of goodwill, equal to the excess of the fair value of the purchase consideration over the fair values of the net tangible and intangible assets acquired, which is tax deductible over a fifteen-year period. The following table summarizes the fair value acquisition accounting for Pandora on the September 29, 2010 purchase date (in thousands):
 
 
Fair value acquired
 
Cash
 
$
297

 
Accounts receivable
 
416

 
Indemnification asset
 
1,000

 
Intangibles
 
2,420

 
Goodwill
 
3,561

 
Deferred tax asset
 
108

 
Total assets
 
7,802

 
Accrued compensation/other
 
(292
)
 
Deferred service revenue
 
(510
)
 
Litigation contingency
 
(1,000
)
 
Total liabilities
 
(1,802
)
 
Net assets acquired
 
$
6,000

 
 
 
 
 
Cash consideration, fair value
 
$
6,000

 

The $0.4 million fair value of accounts receivable consists of gross contractual commitments from customers less the amount not expected to be collected. The $0.5 million of deferred service revenue represents the fair value, using estimated discounted cash flows, of acquired remaining performance obligations under service contracts.
Additionally, an acquired legal contingency related to a contractual dispute between Pandora and a third party resulted in a liability accrual of $1.0 million, measured under ASC 450, Contingencies, guidance. An indemnification asset of $1.0 million was also recorded, since the former shareholders of Pandora had agreed to indemnify Omnicell against losses related to the litigation and a portion of the purchase price was placed in escrow to secure the indemnification obligations of the former Pandora shareholders.
This lawsuit was settled on February 17, 2011 for $1.2 million, the settlement amount of which was paid entirely from the selling shareholders' escrow account. As this is considered a new development, rather than evidence of conditions existing at the September 29, 2010 acquisition date, the disclosure of this dispute in the original purchase price allocation was not adjusted. However, as a recognized subsequent event, on our balance sheet as of December 31, 2010 we recorded the updated $1.2 million values for the acquired legal contingency and the indemnification asset. Furthermore, during the three months ended March 31, 2011, the $1.2 million asset and $1.2 million liability were reversed after settlement from the seller's escrow account. There was no impact on net income for either 2010 or 2011.
Operating results of Pandora have been combined with our operating results from the date of acquisition. Pro forma combined operating results for Omnicell and Pandora for the year ended December 31, 2010 has been omitted since the results of operations of Pandora were not material.