NOTE 6. SEGMENT RESULTS

On December 28, 2013, EHSI's Board of Directors approved a plan to sell its HealthTronics business segment and the Company entered into a definitive agreement to sell the business segment on January 9, 2014. Until it was sold on February 3, 2014, the assets of this business segment and related liabilities were classified as held for sale in the Condensed Consolidated Balance Sheet. Depreciation and amortization expense was not recorded on assets held for sale. The operating results of this business segment are reported as discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. For additional information, see Note 3. Discontinued Operations.

Concurrent with the February 28, 2014 acquisition of Paladin, the Company changed the names of its reportable segments. This change to our segments had no impact on the Company’s unaudited Condensed Consolidated Financial Statements for all periods presented. In addition, the International Pharmaceuticals segment was added, which is comprised solely of the operations of the acquired Paladin business.

The four reportable business segments in which the Company now operates are: (1) U.S. Branded Pharmaceuticals (f/k/a Endo Pharmaceuticals), (2) U.S. Generic Pharmaceuticals (f/k/a Qualitest), (3) Devices (f/k/a AMS) and (4) International Pharmaceuticals. 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 its respective products and is discussed in more detail below.

We evaluate segment performance based on each segment’s adjusted income (loss) from continuing operations before income tax, which we define as (loss) income from continuing operations before income tax before certain upfront and milestone payments to partners, acquisition-related and integration items, 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 of the corporate general and administrative expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company's segments and are included in the results below as "Corporate unallocated". The Company's consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segment less these unallocated corporate costs.

U.S. Branded Pharmaceuticals

The U.S. Branded 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^®, Fortesta^® Gel, Supprelin^® LA, Vantas^®, Valstar^® and Aveed^TM.

U.S. Generic Pharmaceuticals

The U.S. Generic Pharmaceuticals 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. The product offerings of this segment include products in the pain management, urology, CNS disorders, immunosuppression, oncology, women’s health and hypertension markets, among others.

Devices

The Devices segment 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 or prostate health) therapy. AMS distributes devices through its direct sales force and independent sales representatives in the U.S., Canada, Australia and Western Europe. Additionally, AMS distributes devices through foreign independent distributors, primarily in Europe, Asia, and South America, who then sell the products to medical institutions. None of AMS's customers or distributors accounted for 10% or more of our total revenues during the three months ended March 31, 2014 and 2013. Foreign subsidiary sales are predominantly to customers in Canada, Australia and Western Europe.

International Pharmaceuticals

The International Pharmaceuticals segment includes a variety of specialty pharmaceutical products for the Canadian and world markets, which we acquired from Paladin. Key products serve growing drug markets including ADHD, pain, urology and allergy.

The following represents selected information for the Company’s reportable segments for the three months ended March 31, 2014 and 2013 (in thousands):



	Three Months Ended March 31,
	2014			2013
Net revenues to external customers:
U.S. Branded Pharmaceuticals	$	234,165		$	357,589
U.S. Generic Pharmaceuticals	211,855			178,253
Devices (1)	123,767			122,652
International Pharmaceuticals (2)	24,822			—
Total consolidated net revenues to external customers	$	594,609		$	658,494
Adjusted income (loss) from continuing operations before income tax:
U.S. Branded Pharmaceuticals	$	134,417		$	174,407
U.S. Generic Pharmaceuticals	73,797			47,112
Devices	39,705			31,644
International Pharmaceuticals	9,295			—
Corporate unallocated	(79,191		)	(83,017		)
Total consolidated adjusted income from continuing operations before income tax	$	178,023		$	170,146

__________


(1)	The following table displays our Devices segment revenue by geography for the three months ended March 31, 2014 and 2013 (in thousands):



	Three Months Ended March 31,
	2014		2013
Devices:
United States	$	77,459	$	78,367
International	46,308		44,285
Total Devices revenues	$	123,767	$	122,652


(2)	Revenues generated by our International Pharmaceuticals segment are primarily attributable to Canada and South Africa.

The table below provides reconciliations of our consolidated adjusted income from continuing operations before income tax to our consolidated (loss) income from continuing operations before income tax, which is determined in accordance with U.S. GAAP, for the three months ended March 31, 2014 and 2013 (in thousands):



	Three Months Ended March 31,
	2014			2013
Total consolidated adjusted income from continuing operations before income tax:	$	178,023		$	170,146
Upfront and milestone payments to partners	(11,155		)	(2,574		)
Asset impairment charges	—			(1,100		)
Acquisition-related and integration items (1)	(45,269		)	(558		)
Separation benefits and other cost reduction initiatives (2)	(277		)	(13,694		)
Excise tax expense (3)	(60,000		)	—
Amortization of intangible assets	(55,194		)	(47,250		)
Inventory step-up	(3,581		)	—
Non-cash interest expense	(5,969		)	(5,450		)
Loss on extinguishment of debt	(9,596		)	(11,312		)
Watson litigation settlement income, net	—			19,227
Certain litigation-related charges (4)	(641,100		)	(76,532		)
Total consolidated (loss) income from continuing operations before income tax	$	(654,118	)	$	30,903

__________


(1)	Acquisition-related and integration-items include costs directly associated with the closing of certain 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 $5.0 million and $0.8 million for the three months ended March 31, 2014 and 2013, respectively. Refer to Note 4. Restructuring for discussion of our material restructuring initiatives. These amounts are partially offset by changes in estimates related to certain cost reduction initiative accruals. Additionally, the amount of separation benefits and other cost reduction initiatives during the three months ended March 31, 2013 includes an expense recorded upon the cease use date of our Chadds Ford, Pennsylvania properties in the first quarter of 2013, representing the liability for our remaining obligations under the respective lease agreements of $7.2 million. These expenses were primarily recorded as Selling, general and administrative and Research and development expense in our Condensed Consolidated Statements of Operations.


(3)	This amount represents charges for the excise tax pursuant to Section 4985 now that the Company expects the merger between Endo and Paladin to be taxable to U.S. shareholders of EHSI as a result of the shareholder gain from the transaction. The final determination is subject to the Company completing its shareholder basis study, which is expected to be finalized later in 2014.


(4)	These amounts includes charges for Litigation-related and other contingencies, consisting primarily of mesh-related product liability charges, as well as mesh litigation-related defense costs for the three months ended March 31, 2014 and 2013.

The following represents additional selected financial information for our reportable segments for the three months ended March 31, 2014 and 2013 (in thousands):



	Three Months Ended March 31,
	2014		2013
Depreciation expense:
U.S. Branded Pharmaceuticals	$	4,037	$	6,305
U.S. Generic Pharmaceuticals	7,569		3,170
Devices	2,086		2,802
International Pharmaceuticals	141		—
Corporate unallocated	1,894		2,465
Total depreciation expense	$	15,727	$	14,742



	Three Months Ended March 31,
	2014		2013
Amortization expense:
U.S. Branded Pharmaceuticals	$	20,723	$	21,280
U.S. Generic Pharmaceuticals	18,614		10,881
Devices	15,524		15,239
International Pharmaceuticals	$	4,000	$	—
Total amortization expense	$	58,861	$	47,400

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.