Segments

Beginning with the acquisition of MTS, which was completed on May 21, 2012, we have organized our business into two operating business segments: Acute Care, which primarily includes products and services sold to hospital customers and Non-Acute Care, which primarily includes products and services sold to customers outside of hospital settings.

The Acute Care segment is organized around the design, manufacturing, selling and servicing of medication and supply dispensing systems. The Non-Acute Care segment includes primarily the manufacturing and selling of consumable medication blister cards, packaging equipment and ancillary products and services, but also includes medication dispensing systems sold to non-acute care pharmacies and facilities. 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.

Since 1992, Omnicell has provided automation and business information solutions to 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 the acute care environment in hospitals. As the acute care market evolves, we see opportunities to provide medication adherence solutions, which were added to our product line through the acquisition of MTS, to the acute care market as well. A portion of our organization structure and management processes will continue to be structured to optimize sales and service of solutions to the acute care market.

Since 1984, MTS has provided medication adherence solutions to the non-acute care market. These solutions 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. A portion of our organization structure and management processes will continue to be structured to optimize the product, sales, and service of solutions to the non-acute care market.

In 2012, we realigned our management reporting structure to report sales of Omnicell's dispensing systems and other related business transactions into long-term care pharmacies and facilities. Accordingly, the operations of this portion of our activities are now being reflected as a part of the Non-Acute Care segment for the year ended December 31, 2012 and 2013. The impact of this reporting structure change on the year ended December 31, 2011 was immaterial to our overall reported results.

We believe that legislative changes and economic pressures to manage costs will cause healthcare organizations to manage the health of patients across the continuum of care regardless of the setting in which the care is provided. We believe we have the capabilities and market position to provide the tools needed by our customers to manage medications across the continuum of care. But we also believe that the inherent differences between medication management workflows in acute care settings and non-acute care settings will cause our product solutions and marketing strategies to be managed separately for these two customer segments.

In the second quarter of 2013, our management changed its methodology for allocating certain expenses to our reportable segments. We have reclassified segment operating results for the years ended December 31, 2012 to conform to the 2013 presentation. For the years ended December 31, 2013, 2012 and 2011 the contributions of our segments to net revenues and income from operations, and the reconciliation to total net income, were as follows (amounts in thousands):



	December 31,									December 31,									December 31,
	2013									2012									2011
	Acute Care			Non-Acute Care			Total			Acute Care			Non-Acute Care (1)			Total			Acute Care			Total
Net revenues from external customers	$	284,666		$	95,919		$	380,585		$	260,160		$	53,867		$	314,027		$	245,535		$	245,535
Cost of revenues	122,816			54,370			177,186			111,599			31,840			143,439			109,751			109,751
Gross profit	$	161,850		$	41,549		$	203,399		$	148,561		$	22,027		$	170,588		$	135,784		$	135,784
Gross margin %	56.9		%	43.3		%	53.4		%	57.1		%	40.9		%	54.3		%	55.3		%	55.3		%

Operating expenses	131,811			36,289			168,100			127,467			15,995			143,462			119,562			119,562
Income from operations	$	30,039		$	5,260		$	35,299		$	21,094		$	6,032		$	27,126		$	16,222		$	16,222
Operating margin %	10.6		%	5.5		%	9.3		%	8.1		%	11.2		%	8.6		%	6.6		%	6.6		%

Interest and other income (expense), net							(270		)							(51		)				(133		)
Income before provision for income taxes							35,029									27,075						16,089
Provision for income taxes							11,050									10,897						5,700
Net income							$	23,979								$	16,178					$	10,389

(1) Non-Acute Care segment includes MTS results from May 21, 2012, the closing date of acquisition.

At December 31, 2013, 2012, and 2011 segment assets, depreciation and amortization, and capital expenditures were as follows (amounts in thousands):



	December 31,						December 31,						December 31,
	2013						2012						2011
	Acute Care		Non-Acute Care (1)		Total		Acute Care		Non-Acute Care (1)		Total		Acute Care		Total
Segment Assets	$	263,154	$	229,347	$	492,501	$	235,186	$	206,633	$	441,819	$	363,849	$	363,849
Depreciation/Amortization	$	11,236	$	7,129	$	18,365	$	9,017	$	4,308	13,325		7,983		7,983
Capital Expenditures	$	4,392	$	7,943	$	12,335	$	13,234	$	1,953	$	15,187	$	8,685	$	8,685

(1) Non-Acute Care segment includes MTS results from May 21, 2012, the date of acquisition.

For the year ended December 31, 2012, the Non-Acute Care cost of revenues included $1.7 million of acquisition-related charges primarily associated with the step-up to the estimated fair value of inventory acquired from MTS and consumed in the normal sales cycle of our business. The Non-Acute Care operating expenses included $0.9 million of acquisition-related charges primarily associated with severance expenses. For the year ended December 31, 2012, the Acute Care operating expenses included $2.3 million of acquisition-related charges for transaction costs, required to be expensed under ASC 805, Business Combinations.