NOTE 5. SEGMENT RESULTS

The Company has four reportable segments: (1) Endo Pharmaceuticals, (2) Qualitest, (3) AMS and (4) HealthTronics. These segments reflect the level at which executive management regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of their respective products or services and is discussed in more detail below.

We evaluate segment performance based on each segment’s adjusted income before income tax. We define adjusted income before income tax as income (loss) before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, net, cost reduction and integration-related initiatives, asset impairment charges, amortization of intangible assets related to marketed products and customer relationships, inventory step-up recorded as part of our acquisitions, non-cash interest expense, litigation-related and other contingent matters and certain other items that the Company believes do not reflect its core operating performance.

Certain corporate general and administrative expenses are not allocated and are therefore included within Corporate unallocated. We calculate consolidated adjusted income before income tax by adding the adjusted income before income tax of each of our reportable segments to Corporate unallocated adjusted income before income tax.

Endo Pharmaceuticals

The Endo Pharmaceuticals segment includes a variety of branded prescription products related to treating and managing pain as well as our urology, endocrinology and oncology products. The marketed products that are included in this segment include Lidoderm^®, Opana^® ER, Voltaren^® Gel, Percocet^®, Frova^®, Supprelin^® LA, Vantas^®, Valstar^® and Fortesta^® Gel.

Qualitest

The Qualitest segment is composed of our legacy Endo non-branded generics portfolio and the portfolio from Qualitest Pharmaceuticals, which we acquired in 2010. The Qualitest segment has historically focused on selective generics related to pain that have one or more barriers to market entry, such as complex formulation, regulatory or legal challenges or difficulty in raw material sourcing. With the addition of Qualitest Pharmaceuticals, the segment’s product offerings now include products in the pain management, urology, central nervous system (CNS) disorders, immunosuppression, oncology, women’s health and hypertension markets, among others.

AMS

The AMS segment currently focuses on providing technology solutions to physicians treating men’s and women’s pelvic health conditions and operates in the following business lines: men’s health, women’s health, and benign prostatic hyperplasia (BPH) therapy. We distribute devices through our direct sales force and independent sales representatives in the U.S., Canada, Australia and Western Europe. Additionally, we distribute devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of our AMS customers or distributors accounted for ten percent or more of our total revenues during the three months ended March 31, 2013 or 2012. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe.

HealthTronics

The HealthTronics segment provides urological services, products and support systems to urologists, hospitals, surgery centers and clinics across the U.S. These services are sold through the following business lines: lithotripsy services, prostate treatment services, anatomical pathology services, medical products manufacturing, sales and maintenance and electronic medical records services.

The following represents selected information for the Company’s reportable segments for the three months ended March 31, 2013 and 2012 (in thousands):



	Three Months Ended March 31,
	2013			2012
Net revenues to external customers:
Endo Pharmaceuticals	$	357,589		$	363,574
Qualitest	178,253			145,345
AMS(1)	122,652			130,166
HealthTronics	50,025			51,548
Total consolidated net revenues to external customers	$	708,519		$	690,633
Adjusted income before income tax:
Endo Pharmaceuticals	$	174,407		$	178,826
Qualitest	47,112			36,251
AMS	31,644			27,052
HealthTronics	10,289			12,408
Corporate unallocated	(84,498		)	(92,160		)
Total consolidated adjusted income before income tax	$	178,954		$	162,377

__________


(1)	The following table displays our AMS segment revenue by geography (in thousands). International revenues were not material to any of our other segments for any of the periods presented.



	Three Months Ended March 31,
	2013		2012
AMS:
United States	$	78,367	$	86,970
International	44,285		43,196
Total AMS revenues	$	122,652	$	130,166

The table below provides reconciliations of our consolidated adjusted income before income tax to our consolidated income (loss) before income tax, which is determined in accordance with U.S. GAAP, for the three months ended March 31, 2013 and 2012 (in thousands):



	Three Months Ended March 31,
	2013			2012
Total consolidated adjusted income before income tax:	$	178,954		$	162,377
Upfront and milestone payments to partners	(2,574		)	(45,841		)
Asset impairment charges	(1,100		)	(40,000		)
Acquisition-related and integration items, net(1)	(1,318		)	(3,749		)
Separation benefits and other cost reduction initiatives(2)	(14,404		)	(11,614		)
Amortization of intangible assets	(48,946		)	(53,360		)
Inventory step-up	—			(1,262		)
Non-cash interest expense	(5,450		)	(4,976		)
Net loss on extinguishment of debt	(11,312		)	(5,426		)
Watson litigation settlement income, net	19,227			—
Accrual for payment to Impax Laboratories Inc. related to sales of Opana® ER	—			(110,000		)
Certain litigation-related charges(3)	(76,532		)	—
Total consolidated income (loss) before income tax	$	36,545		$	(113,851	)

__________


(1)	Included within this line are transaction costs directly associated with the closing of certain immaterial acquisitions, changes in the fair value of contingent consideration and the costs of integration activities related to both current and prior period acquisitions.

(2)

Separation benefits and other cost reduction initiatives include employee separation costs of $1.5 million and $11.2 million for the three months ended March 31, 2013 and 2012, respectively. As of March 31, 2013, approximately $13.3 million of employee separation costs are included in Accrued expenses on the Condensed Consolidated Balance Sheets. Approximately $6.6 million was paid during the three months ended March 31, 2013 and the majority of the balance is expected to be paid over the remainder of 2013. Additionally, Separation benefits and other cost reduction initiatives includes an expense recorded upon the cease use date of our Chadds Ford, Pennsylvania properties in the first quarter of 2013, representing a liability for our remaining obligations under the respective lease agreements of $7.2 million. The expense was recorded as Selling, general and administrative expense in our Condensed Consolidated Statements of Operations.


(3)	Included within this amount for the three months ended March 31, 2013 are charges for Litigation-related and other contingencies, consisting primarily of mesh-related product liability charges, as well as mesh litigation-related defense costs.

The following represents additional selected financial information for our reportable segments for the three months ended March 31, 2013 and 2012 (in thousands):



	Three Months Ended March 31,
	2013		2012
Depreciation expense:
Endo Pharmaceuticals	$	6,305	$	3,798
Qualitest	3,170		2,937
AMS	2,802		2,656
HealthTronics	2,981		2,992
Corporate unallocated	2,465		1,064
Total depreciation expense	$	17,723	$	13,447



	Three Months Ended March 31,
	2013		2012
Amortization expense:
Endo Pharmaceuticals	$	21,280	$	21,934
Qualitest	10,881		10,381
AMS	15,239		19,406
HealthTronics	1,696		1,789
Total amortization expense	$	49,096	$	53,510

Interest income and expense are considered corporate items and are not allocated to our segments. Asset information is not accounted for at the segment level and consequently is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.