Employee Benefits and Share-Based Compensation

Stock purchase plan

1997 Employee Stock Purchase Plan

We have an Employee Stock Purchase Plan ("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; provided, however, an eligible employees' right to purchase shares of our common stock may not accrue at a rate which exceeds $25,000 of the fair market value of such shares for each calendar year in which such rights are outstanding. 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.

At our 2009 Annual Meeting of Stockholders ("2009 Annual Meeting"), the stockholders approved an amendment to the ESPP, which added 2.6 million shares to the reserve for future issuance. There was a total of 0.6 million shares reserved for future issuance under the ESPP as of December 31, 2014. For the year ended December 31, 2014, 0.5 million shares of common stock were purchased under the ESPP and an aggregate of 4.7 million shares were issued under the ESPP as of December 31, 2014.

The unrecognized compensation cost related to the shares to be purchased under our ESPP was approximately $1.8 million, and is expected to be recognized over a weighted-average period of 0.7 years as of December 31, 2014.

Stock award plans

2009 Equity Incentive Plan

On May 19, 2009, at our 2009 Annual Meeting, our stockholders approved the Omnicell, Inc. 2009 Equity Incentive Plan ("2009 Plan") which authorized 2.1 million shares to be issued. The 2009 Plan provides for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance stock awards, performance cash awards and other stock awards to our employees, directors and consultants.

The 2009 Plan succeeded the 1999 Equity Incentive Plan, the 2003 Equity Incentive Plan and the 2004 Equity Incentive Plan (collectively, 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. For purposes of determining future common shares available for grant, for each share granted as a full-value award, including restricted stock awards ("RSAs"), restricted stock unit awards ("RSUs") and performance stock awards, the shares available for issuance were reduced by 1.4 shares for each share granted. Equity awards granted as options and stock appreciation rights reduce the shares available for issuance by one share.

On December 16, 2010, at a Special Meeting of Stockholders, our stockholders approved an amendment to increase the number of shares of common stock authorized for issuance under the 2009 Plan by 2.6 million shares and to provide that the number of common stock shares available for issuance under the 2009 Plan be reduced by 1.8 shares for each share granted as a full-value award granted on and after October 1, 2010. For each share granted as a full-value award granted prior to October 1, 2010, future shares available for grants under the 2009 Plan were reduced by 1.4 shares. Awards granted as stock options and stock appreciation rights continue to reduce the number of shares available for issuance under the 2009 Plan on a one-for-one basis. At our 2013 Annual Meeting of Stockholders, our stockholders approved an amendment to the 2009 Plan to increase the number of shares of common stock authorized for issuance by 2.5 million shares. There were 1.8 million shares of common stock reserved for future issuance under the 2009 Plan as of December 31, 2014.

Options granted under the 2009 Plan generally become exercisable over periods of up to 4 years, generally with one-fourth of the shares vesting one year from the vesting commencement date with respect to initial grants, and the remaining shares vesting in 36 equal monthly installments thereafter; however our Board of Directors may impose different vesting terms at its discretion on any award. Options under the 2009 Plan generally expire 10 years from the date of grant. We also grant both restricted stock and restricted stock units to participants under the 2009 Plan. The Board of Directors determines the award amount, the vesting provisions and the expiration period (not to exceed ten years) for each grant. Grants of restricted stock to non-employee directors are granted on the date of our annual meeting of stockholders and vest in full on the date of our next annual meeting of stockholders, provided such non-employee director remains a director on such date. The fair value of the stock on the date of issuance is amortized to expense from the date of grant to the date of vesting. RSUs granted to employees generally vest over a period of four years and are expensed ratably on a straight-line basis over the vesting period. We consider the dilutive impact of options, restricted stock and restricted stock units in our diluted net income per share calculation.

The 2009 Plan provides that our Board of Directors shall administer the 2009 Plan unless and until the Board of Directors delegates administration to a committee. Our Board of Directors has delegated administration of the 2009 Plan to the Compensation Committee of the Board and the 2009 Plan is generally administered by such committee. The Board of Directors may suspend or terminate the 2009 Plan at any time. The Board of Directors may also amend the 2009 Plan at any time or from time to time. However, no amendment will be effective unless approved by our stockholders after its adoption by the Board of Directors to the extent stockholder approval is necessary to satisfy the applicable listing requirements of NASDAQ.

Performance-based restricted stock units

In 2011, we began incorporating performance-based restricted stock units ("PSUs") as an element of our executive compensation plans. In 2012, we granted 125,000 PSUs to our executive officers, of which 62,500 PSUs became eligible for vesting upon the achievement of a certain level of shareholder return for 2012. In 2013, we granted 137,500 PSUs to our executive officers all of which became eligible for vesting upon the achievement of a certain level of shareholder return for the period from January 1, 2013 through February 28, 2014. In 2014, we granted 132,500 PSUs to our executive officers, all, none or a portion of which may become eligible for vesting depending on the level of shareholder return for 2014 and eligible for further time-based vesting based on the ranking of our total shareholder return.

The fair value of a PSU award is the average of trial-specific values of the award over each of one million Monte Carlo trials. Each trial-specific value is the market value of the award at the end of the one-year performance period discounted back to the grant date. The market value of the award for each trial at the end of the performance period is the product of (a) the per share value of Omnicell stock at the end of the performance period and (b) the number of shares that vest. The number of shares that vest at the end of the performance period depends on the percentile ranking of the total shareholder return for Omnicell stock over the performance period relative to the total shareholder return of each of the other companies in the NASDAQ Healthcare Index (the "Index").

Vesting for the PSUs is based both on the percentile placement of our total stockholder return among the companies listed in the Index and time-based vesting. We calculate total stockholder return based on the one year annualized rates of return reflecting price appreciation plus reinvestment of dividends. For PSUs granted on February 4, 2014, stock price appreciation is calculated based on the trailing 20-day average stock price from the first trading day of March 2014, compared to the trailing 20-day average stock price from the first trading day of March 2015. For PSUs granted in 2013, stock price appreciation is calculated based on the average closing prices of the applicable company’s common stock for the 20 trading days ended on the last trading day of 2012 as compared to the average closing prices of the common stock for the 20 trading days preceding the first trading day of March 2014. For PSUs granted in 2012, stock price appreciation is calculated based on the average closing prices of the applicable company's common stock for the 20 trading days ending on the last trading day of 2011 as compared to the average closing prices for the 20 trading days ended on the last trading day of 2012.

On January 17, 2012, the Compensation Committee confirmed 76.3% as the percentile rank of our 2011 total stockholder return. This resulted in 120% of the 2011 PSUs, or 120,000 shares, becoming eligible for further time-based vesting. The eligible PSUs vest as follows: 25% of the eligible awards for the first year vested on January 17, 2012 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three-year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service. Of the 120,000 shares eligible for time-based vesting under the 2011 PSUs, 30,000 shares vested during the year ended December 31, 2014.

On January 22, 2013, the Compensation Committee confirmed 35.3% as the percentile rank of our 2012 total stockholder return. This resulted in 50% of the 2012 PSUs, or 62,500 shares, as eligible for further time-based vesting. The eligible PSUs vest as follows: 25% of the eligible shares vested immediately on January 22, 2013 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three-year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service. Of the 62,500 shares eligible for time-based vesting under the 2012 PSUs, 15,600 shares vested during the year ended December 31, 2014.

On March 20, 2014, the Compensation Committee confirmed 63.9% as the percentile rank of our 2013 total stockholder return. This resulted in 100% of the 2013 PSUs, or 137,500 shares, as eligible for further time-based vesting. The eligible performance based restricted stock unit awards will vest as follows: 25% of the eligible shares vested immediately on March 20, 2014 with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three-year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service. Of the 137,500 shares eligible for time-based vesting under the 2013 PSUs, 68,750 shares vested during the year ended December 31, 2014.

On February 5, 2014, the Compensation Committee approved PSUs of 132,500 shares. If the minimum performance threshold is met as determined by the Compensation Committee in 2015, the eligible performance-based restricted stock unit awards will vest as follows: 25% of the eligible shares will vest immediately, with the remaining eligible awards vesting in equal increments, semi-annually, over the subsequent three year period beginning on June 15th and December 15th of the year after the date of grant and each subsequent year. Vesting is contingent upon continued service.

Valuation of share-based awards

The fair value of each option grant is estimated on the date of grant using the Black-Scholes-Merton option-pricing model. The fair value of shares issued under the employee stock purchase plans is estimated on the date of issuance using the Black-Scholes-Merton model.

The following assumptions were used to estimate the fair value of share-based awards:



	Year Ended
	December 31, 2014		December 31, 2013		December 31, 2012
Stock Option Plans
Risk-free interest rate ⁽¹⁾	1.6	%	1.2	%	0.9	%
Dividend yield	—	%	—	%	—	%
Expected volatility ⁽²⁾	34.9	%	43.1	%	45.8	%
Expected life ⁽³⁾	4.8 years		5.3 years		5.2 years



	Year Ended
	December 31, 2014		December 31, 2013		December 31, 2012
Employee Stock Purchase Plan
Risk-free interest rate ⁽¹⁾	0.2	%	0.2	%	0.2	%
Dividend yield	—	%	—	%	—	%
Expected volatility ⁽²⁾	33.2	%	35.1	%	38.5	%
Expected life ⁽³⁾	0.5 - 2 years		0.5 - 2 years		0.5 - 2 years

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⁽¹⁾	The risk-free interest rate for both stock options and the ESPP is based on the zero-coupon U.S. Treasury rate curve in effect at the time of the option grant or at the beginning of the ESPP offering period.

⁽²⁾

Expected volatility for both stock options and the ESPP reflects a combination of historical and market-based implied volatility consistent with ASC 718 and SEC Staff Accounting Bulletin 107. We determined that the combination of historical and market-based implied volatility provides a more accurate reflection of our market conditions and is more representative of future stock price trends than employing solely historical volatility.


⁽³⁾	Represents the period of time that options granted are expected to be outstanding, which is derived from historical data on employee exercise and post-vesting employment termination behavior.

Share-based compensation expense

We account for share-based awards granted to employees and directors, including employee stock option awards, restricted stock, PSUs and RSUs issued pursuant to the 2009 Plan and employee stock purchases made under our ESPP using the estimate grant date fair value method of accounting in accordance with ASC 718, Stock Compensation. We value options and ESPP shares using the Black-Scholes-Merton option-pricing model. Restricted stock and time-based RSUs are valued at the grant date fair value of the underlying common shares. The PSUs are valued using the Monte Carlo simulation model.

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



	Year Ended
	December 31, 2014		December 31, 2013		December 31, 2012
	(In thousands)
Cost of product and service revenues	$	1,456	$	1,241	$	1,011
Research and development	1,655		1,359		889
Selling, general and administrative	9,674		8,551		7,314
Total share-based compensation expense	$	12,785	$	11,151	$	9,214

We did not capitalize any share-based compensation as inventory as such amounts were not material for the years ended December 31, 2014, December 31, 2013 and December 31, 2012. Income tax benefits realized from share-based compensation were $4.5 million, $2.4 million and $2.6 million, for the years ended December 31, 2014, December 31, 2013 and December 31, 2012, respectively.

Stock options activity

A summary of the stock option activity under the 2009 Plan is presented below:



	Number of Shares		Weighted-Average Exercise Price		Weighted-Average Remaining Years	Aggregate Intrinsic Value⁽¹⁾
	(In thousands, except per share data)
Outstanding at December 31, 2013	3,143		$	15.82	5.6
Granted	641		28.11
Exercised	(1,007	)	14.74
Expired	(12	)	19.88
Forfeited	(93	)	19.97
Outstanding at December 31, 2014	2,672		$	19.02	6.5	$	37,692
Exercisable at December 31, 2014	1,514		$	15.66	4.7	$	26,447
Vested and expected to vest at December 31, 2014	2,640		$	18.92	6.4	$	37,481

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

The weighted-average fair value per share of options granted during 2014, 2013 and 2012 was $9.12, $8.09 and $6.13, respectively. The intrinsic value of options exercised during 2014, 2013 and 2012 was $14.1 million, $14.0 million and $2.8 million, respectively.

As of December 31, 2014, total unrecognized compensation cost related to unvested stock options was $8.8 million, which is expected to be recognized over a weighted-average vesting period of 2.8 years.

Restricted stock activity

A summary of the restricted stock activity under the 2009 Plan is presented below:



	Number of Shares		Weighted-Average Grant Date Fair Value		Weighted-Average Remaining Years	Aggregate Intrinsic Value
	(In thousands, except per share data)
Restricted Stock Units
Outstanding at December 31, 2013	362		$	17.15	2.5
Granted	238		28.88
Vested	(181	)	17.51
Forfeited	(20	)	16.50
Outstanding and unvested at December 31, 2014	399		$	24.00	1.5	$	13,190
Expected to vest at December 31, 2014	387				1.5	$	12,807

The weighted-average grant date fair value per share of RSUs granted during 2014, 2013 and 2012 was $28.88, $19.87 and $14.58, respectively. The total fair value of RSUs that vested in 2014, 2013 and 2012 was $3.2 million, $4.4 million and $2.3 million, respectively.

As of December 31, 2014, total unrecognized compensation cost related to RSUs was $8.7 million, which is expected to be recognized over the remaining weighted-average vesting period of 2.6 years.



	Number of Shares		Weighted-Average Grant Date Fair Value
	(In thousands, except per share data)
Restricted Stock Awards
Outstanding at December 31, 2013	52		$	18.43
Granted	38		26.42
Vested	(54	)	18.68
Forfeited	—		—
Outstanding and unvested at December 31, 2014	36		$	26.47

The weighted-average grant date fair value per share of RSAs granted during 2014, 2013 and 2012 was $26.42, $18.20 and $14.19, respectively. The total fair value of RSAs that vested in 2014, 2013 and 2012 was $1.0 million, $1.1 million and $1.1 million, respectively.

As of December 31, 2014, total unrecognized compensation cost related to RSAs was $0.4 million, which is expected to be recognized over the remaining weighted-average vesting period of 0.5 years.

Performance-based restricted stock units activity

A summary of the performance-based restricted stock activity under the 2009 Plan is presented below:



	Number of Shares		Weighted-Average Grant Date Fair Value Per Unit
	(In thousands, except per share data)
Unvested at December 31, 2013	225		$	13.32
Granted	158		20.94
Vested	(114	)	13.32
Cancelled	(36	)	16.73
Unvested at December 31, 2014	233		$	17.96

The weighted-average grant date fair value per share of PSUs granted during 2014, 2013 and 2012 was $20.94, $14.68 and $10.94, respectively. The total fair value of PSUs that vested in 2014, 2013 and 2012 was $1.5 million, $0.7 million and $0.7 million, respectively.

As of December 31, 2014, total unrecognized compensation cost related to PSUs was approximately $2.0 million, which is expected to be recognized over the remaining weighted-average period of 1.2 years.

401(k) Plan

We have established a 401(k) tax-deferred savings plan ("Omnicell Plan"), whereby eligible employees may contribute a percentage of their eligible compensation, but not greater than 75% of their earnings, up to the maximum as required by law. On January 1, 2009, we began matching 401(k) contributions, up to a maximum of 3% of employee contributions, not to exceed $1,000 for the year. In the first quarter of 2013, the MTS 401(k) tax-deferred savings plan was merged with the Omnicell Plan. On January 1, 2014, the Omnicell Plan was changed to match 50% of employee contributions up to $1,500, with no limit to employee contributions as long as such contributions do not exceed 75% of their earnings. Effective January 1, 2015, we will begin to match 50% of employee contributions up to $2,000, with the same limitations on employee contributions as of January 1, 2014.

Our contributions under the Omnicell Plan were $1.3 million, $1.1 million and $0.8 million in 2014, 2013 and 2012, respectively.

Preferred Stock

There were 5.0 million preferred shares authorized, and no preferred shares issued or outstanding as of December 31, 2014 and December 31, 2013.