Segments

Prior to the first quarter of 2014, we organized our business into two operating business segments, the Acute Care and Non-Acute Care segments, which were based on the target customers for our products. The Acute Care segment primarily included products and services sold to hospital customers, and the Non-Acute Care segment primarily included products and services sold to customers outside of hospital settings.

In the first quarter of 2014, we realigned our segments based on the products we sell, regardless of who they are sold to because our business has evolved to be managed more on a product basis, rather than on a customer-type basis. It has become more difficult to determine whether a customer is a hospital or a blend of hospitals and non-acute care facilities. We are at a point where many of our Acute Care and Non-Acute Care customers are converging to provide services across the continuum of care. These customers seek automation and analytics products that function across the various facilities they manage. We find ourselves providing solutions across multiple types of care environments. These customers are also interested in obtaining higher levels of adherence to prescribed medication regimens that our blister card products provide.

Our two reportable segments are the Automation and Analytics segment and the Medication Adherence segment. The Automation and Analytics segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems, pharmacy inventory management systems, and related software. The Medication Adherence segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services.

Prior period amounts in the tables below have been recast to conform to the way we internally manage and monitor performance at the segment level during the current period.

We report segment information based on the management approach. The management approach designates the internal reporting used by the Chief Operating Decision Maker (the "CODM") for making decisions and assessing performance as the source of our operating segments. The CODM is our Chief Executive Officer. The CODM allocates resources to and assesses the performance of each operating segment, using information about its revenues, gross profit and income (loss) from operations. The CODM does not evaluate operating business segments using discrete asset information; accordingly, we do not report segment assets.

Since 1992, Omnicell has provided automation and business information solutions to healthcare facilities in general, but with a focus on acute care hospitals. We have developed product solutions that help optimize various workflows utilized in hospitals. We have also developed sophisticated sales, installation, and service capabilities to serve the specific and special needs of hospitals. As the healthcare market evolves, acute care facilities are beginning to merge operationally with non-acute care facilities. The new healthcare organizations desire medication and supply inventory control and business analytics across the continuum of care environments they serve. Our Automation and Analytics segment represents the products we sell to fulfill these needs.

Since 1984, MTS has provided medication adherence solutions to the non-acute care market. In 2012, we acquired MTS. The solutions supplied by MTS provide automated and semi-automated equipment to assist institutional and retail pharmacists in filling medication orders into blister cards, the primary method of medication control in non-acute care settings. Completing the product solution are the consumables used by institutional and retail pharmacists to make the medication adherence package. MTS has developed process manufacturing capabilities as well as sales capabilities to market medication adherence solutions to institutional and retail pharmacies. As healthcare evolves, these medication adherence solutions are finding application in acute care settings as well. Our Medication Adherence segment represents all the products we sell to fulfill medication adherence needs through blister cards, blister card packaging equipment, and related software.

In August of 2014, we acquired Surgichem. Based in Stockport, UK, Surgichem is a provider of medication adherence packaging solutions to the UK care home and domiciliary care markets since 1989. Surgichem supplies its monitored dosage systems to a network of over 3,200 independent pharmacies and UK pharmacy chains. Surgichem is part of our Medication Adherence segment.

The contributions of our operating segments to net revenues and income from operations, and the reconciliation to total net income, were as follows (amounts in thousands):



	Three Months Ended September 30, 2014									Three Months Ended September 30, 2013
	Automation and Analytics			Medication Adherence			Total			Automation and Analytics			Medication Adherence			Total
Total revenues	$	89,546		$	22,997		$	112,543		$	75,110		$	18,929		$	94,039
Cost of revenues	38,412			14,585			52,997			30,240			11,759			41,999
Gross profit	$	51,134		$	8,412		$	59,546		$	44,870		$	7,170		$	52,040
Gross margin %	57.1		%	36.6		%	52.9		%	59.7		%	37.9		%	55.3		%

Operating expenses	38,662			7,287			45,949			35,052			6,271			41,323
Income from operations	$	12,472		$	1,125		$	13,597		$	9,818		$	899		$	10,717
Operating margin %	13.9		%	4.9		%	12.1		%	13.1		%	4.7		%	11.4		%

Interest and other income (expense), net							(706		)							25
Income before provision for income taxes							12,891									10,742
Provision for income taxes							5,591									2,987
Net income							$	7,300								$	7,755



	Nine Months Ended September 30, 2014									Nine Months Ended September 30, 2013
	Automation and Analytics			Medication Adherence			Total			Automation and Analytics			Medication Adherence			Total
Total revenues	$	255,747		$	63,612		$	319,359		$	217,688		$	57,147		$	274,835
Cost of revenues	109,345			39,933			149,278			92,465			35,595			128,060
Gross profit	$	146,402		$	23,679		$	170,081		$	125,223		$	21,552		$	146,775
Gross margin %	57.2		%	37.2		%	53.3		%	57.5		%	37.7		%	53.4		%

Operating expenses	112,572			21,400			133,972			101,425			21,106			122,531
Income from operations	$	33,830		$	2,279		$	36,109		$	23,798		$	446		$	24,244
Operating margin %	13.2		%	3.6		%	11.3		%	10.9		%	0.8		%	8.8		%

Interest and other income (expense), net							(1,003		)							(134		)
Income before provision for income taxes							35,106									24,110
Provision for income taxes							13,824									6,954
Net income							$	21,282								$	17,156

Segment depreciation and amortization, and capital expenditures were as follows (amounts in thousands):



	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
	Automation and Analytics		Medication Adherence		Total		Automation and Analytics		Medication Adherence		Total
Depreciation and amortization	$	3,460	$	1,854	$	5,314	$	2,805	$	1,683	$	4,488
Capital expenditures	$	2,635	$	785	$	3,420	$	1,311	$	745	$	2,056



	Nine Months Ended September 30, 2014						Nine Months Ended September 30, 2013
	Automation and Analytics		Medication Adherence		Total		Automation and Analytics		Medication Adherence		Total
Depreciation and amortization	$	9,402	$	5,303	$	14,705	$	8,351	$	5,381	$	13,732
Capital expenditures	$	8,802	$	1,953	$	10,755	$	3,329	$	4,478	$	7,807