UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 1-11083

BOSTON SCIENTIFIC CORPORATION

(Exact name of registrant as specified in its charter)

DELAWARE	04-2695240
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

300 BOSTON SCIENTIFIC WAY, MARLBOROUGH, MASSACHUSETTS 01752-1234

(Address of principal executive offices) (zip code)

(508) 683-4000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ	Accelerated filer o
Non-Accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

	Shares outstanding
Class	as of October 31, 2017
Common Stock, $0.01 par value	1,373,195,517

TABLE OF CONTENTS

		Page No.
PART I	FINANCIAL INFORMATION	3
ITEM 1.	Condensed Consolidated Financial Statements	3
	Condensed Consolidated Statements of Operations (Unaudited)	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)	4
	Condensed Consolidated Balance Sheets (Unaudited as of September 30, 2017)	5
	Condensed Consolidated Statements of Cash Flows (Unaudited)	6
	Notes to the Condensed Consolidated Financial Statements (Unaudited)	7
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	33
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	55
ITEM 4.	Controls and Procedures	56
PART II	OTHER INFORMATION	57
ITEM 1.	Legal Proceedings	57
ITEM 1A.	Risk Factors	57
ITEM 6.	Exhibits	57
SIGNATURE		58

2

PART I

FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
in millions, except per share data	2017			2016			2017			2016
Net sales	$	2,222		$	2,105		$	6,640		$	6,195
Cost of products sold	637			594			1,919			1,805
Gross profit	1,585			1,511			4,721			4,390
Operating expenses:
Selling, general and administrative expenses	800			772			2,408			2,268
Research and development expenses	254			232			734			664
Royalty expense	16			20			50			59
Amortization expense	139			136			424			408
Intangible asset impairment charges	3			7			3			7
Restructuring charges (credits)	12			5			17			22
Contingent consideration expense (benefit)	(4		)	(13		)	(78		)	23
Litigation-related charges (credits)	(12		)	4			196			632
	1,208			1,163			3,754			4,083
Operating income (loss)	377			348			967			307
Other income (expense):
Interest expense	(57		)	(58		)	(172		)	(175		)
Other, net	(11		)	(33		)	(89		)	(44		)
Income (loss) before income taxes	309			257			706			88
Income tax expense (benefit)	26			29			(13		)	(135		)
Net income (loss)	$	283		$	228		$	719		$	223
Net income (loss) per common share — basic	$	0.21		$	0.17		$	0.53		$	0.16
Net income (loss) per common share — assuming dilution	$	0.20		$	0.17		$	0.52		$	0.16
Weighted-average shares outstanding
Basic	1,372.0			1,360.6			1,369.1			1,356.1
Assuming dilution	1,394.1			1,379.7			1,391.8			1,374.9

See notes to the unaudited condensed consolidated financial statements.

3

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2017			2016			2017			2016
Net income (loss)	$	283		$	228		$	719		$	223
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment	25			2			46			(3		)
Net change in unrealized gains and losses on derivative financial instruments	(24		)	(31		)	(100		)	(184		)
Net change in available-for-sale securities	1			—			3			—
Net change in unrealized costs associated with certain retirement plans	—			—			(1		)	—
Total other comprehensive income (loss)	2			(29		)	(52		)	(187		)
Total comprehensive income (loss)	$	285		$	199		$	667		$	36

See notes to the unaudited condensed consolidated financial statements.

4

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	As of
	September 30,			December 31,
in millions, except share and per share data	2017			2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	210		$	196
Trade accounts receivable, net	1,470			1,472
Inventories	1,077			955
Deferred and prepaid income taxes	76			75
Other current assets	645			541
Total current assets	3,478			3,239
Property, plant and equipment, net	1,678			1,630
Goodwill	6,882			6,678
Other intangible assets, net	5,783			5,883
Other long-term assets	815			666
TOTAL ASSETS	$	18,636		$	18,096
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current debt obligations	$	1,266		$	64
Accounts payable	371			447
Accrued expenses	2,551			2,312
Other current liabilities	640			764
Total current liabilities	4,828			3,587
Long-term debt	4,416			5,420
Deferred income taxes	66			18
Other long-term liabilities	1,738			2,338
Commitments and contingencies
Stockholders’ equity
Preferred stock, $0.01 par value - authorized 50,000,000 shares, none issued and outstanding
Common stock, $0.01 par value - authorized 2,000,000,000 shares - issued 1,620,302,039 shares as of September 30, 2017 and 1,609,670,817 shares as of December 31, 2016	16			16
Treasury stock, at cost - 247,566,270 shares as of September 30, 2017 and December 31, 2016	(1,717		)	(1,717		)
Additional paid-in capital	17,125			17,014
Accumulated deficit	(7,785		)	(8,581		)
Accumulated other comprehensive income (loss), net of tax	(51		)	1
Total stockholders’ equity	7,588			6,733
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$	18,636		$	18,096

See notes to the unaudited condensed consolidated financial statements.

5

BOSTON SCIENTIFIC CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
(in millions)	2017			2016
Cash provided by (used for) operating activities	$	554		$	506
Investing activities:
Purchases of property, plant and equipment	(240		)	(209		)
Proceeds on disposals of property, plant and equipment	—			29
Payments for acquisitions of businesses, net of cash acquired	(392		)	(70		)
Net payments for investments, acquisitions of certain technologies and issuances of notes receivable	(89		)	(105		)
Cash provided by (used for) investing activities	(721		)	(355		)
Financing activities:
Payments on long-term borrowings	(1,000		)	(250		)
Net increase (decrease) in commercial paper	1,253			—
Payment of contingent consideration amounts previously established in purchase accounting	(30		)	(35		)
Proceeds from borrowings on credit facilities	2,156			330
Payments on borrowings from credit facilities	(2,216		)	(330		)
Cash used to net share settle employee equity awards	(64		)	(57		)
Proceeds from issuances of shares of common stock	79			108
Cash provided by (used for) financing activities	178			(234		)
Effect of foreign exchange rates on cash	3			1
Net increase (decrease) in cash and cash equivalents	14			(82		)
Cash and cash equivalents at beginning of period	196			319
Cash and cash equivalents at end of period	$	210		$	237
Supplemental Information
Stock-based compensation expense	$	96		$	87
Fair value of contingent consideration recorded in purchase accounting	—			4

See notes to the unaudited condensed consolidated financial statements.

6

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A – BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Boston Scientific Corporation have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for fair presentation have been included. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and footnotes thereto included in Item 8 of our most recent Annual Report on Form 10-K.

Subsequent Events

We evaluate events occurring after the date of our most recent accompanying unaudited condensed consolidated balance sheets for potential recognition or disclosure in our financial statements. We did not identify any material subsequent events requiring adjustment to our accompanying unaudited condensed consolidated financial statements (recognized subsequent events) for the three and nine months ended September 30, 2017. Those items requiring disclosure (unrecognized subsequent events) in the financial statements have been disclosed accordingly. Refer to Note B – Acquisitions and Strategic Investments and Note I – Commitments and Contingenciesfor more information.

NOTE B – ACQUISITIONS AND STRATEGIC INVESTMENTS

2017 Acquisitions

Apama Medical Inc.

On October 10, 2017, we completed the acquisition of Apama Medical Inc. (Apama), a privately-held company developing the Apama™ Radiofrequency single-shot Balloon Catheter System for the treatment of atrial fibrillation. Total consideration was comprised of $175 million cash up-front and a maximum of $125 millionin contingent payments based on the achievement of clinical and regulatory milestones. Apama will be integrated into our Rhythm Management segment.

Symetis SA

On May 16, 2017, we completed the acquisition of Symetis SA (Symetis), a privately-held Swiss structural heart company focused on minimally-invasive transcatheter aortic valve replacement devices, for approximately $430 millionin cash. We are in the process of integrating Symetis into our Interventional Cardiology business and expect the integration to be substantially complete by the end of 2018.

Purchase Price Allocation

We accounted for the acquisition of Symetis as a business combination and, in accordance with FASB ASC Topic 805, Business Combinations, we recorded the assets acquired and liabilities assumed at their respective fair values as of the acquisition date. The components of the aggregate preliminary purchase price are as follows (in millions):

Payment for acquisition, net of cash acquired $ 392

The following summarizes the preliminary purchase price allocation for the Symetis acquisition as of September 30, 2017

(in millions):

Goodwill	$	191
Amortizable intangible assets	278
Other assets acquired	26
Liabilities assumed	(103		)
	$	392

7

We allocated a portion of the purchase price to specific intangible asset categories as follows:

	Amount Assigned (in millions)		Amortization Period (in years)	Risk-Adjusted Discount Rates used in Purchase Price Allocation
Amortizable intangible assets:
Technology-related	$	268	13	24%
Other intangible assets	10		2-13	24%
	$	278

Our technology-related intangible assets consist of technical processes, intellectual property, and institutional understanding with respect to products and processes that we will leverage in future products or processes and will carry forward from one product generation to the next. We used the multi-period excess earnings method, a form of the income approach, to derive the fair value of the technology-related intangible assets, and are amortizing them on a straight-line basis over their assigned estimated useful lives.

Contingent Consideration

Certain of our acquisitions involve contingent consideration arrangements. Payment of additional consideration is generally contingent on the acquired company reaching certain performance milestones, including attaining specified revenue levels, achieving product development targets and/or obtaining regulatory approvals for products in development at the date of the acquisition. In accordance with U.S. GAAP, we recognize a liability equal to the fair value of the contingent payments we expect to make as of the acquisition date. We re-measure this liability each reporting period and record changes in the fair value through a separate line item within our unaudited condensed consolidated statements of operations. We paid contingent consideration of $45 million during the first nine months of2017 and $77 million during the first nine months of2016.

Changes in the fair value of our contingent consideration liabilities were as follows (in millions):

Balance as of December 31, 2016	$	204
Fair value adjustments	(78		)
Contingent payments related to prior period acquisitions	(45		)
Balance as of September 30, 2017	$	81

As of September 30, 2017, the maximum amount of future contingent consideration (undiscounted) that we could be required to pay was approximately $1.261 billion.

Contingent consideration liabilities are remeasured to fair value each reporting period using projected revenues, discount rates, probabilities of payment and projected payment dates. The recurring Level 3 fair value measurements of our contingent consideration liabilities include the following significant unobservable inputs:

Contingent Consideration Liabilities	Fair Value as of September 30, 2017	Valuation Technique	Unobservable Input	Range
R&D and Commercialization-based Milestones	$31 million	Discounted Cash Flow	Discount Rate	2%
			Projected Year of Payment	2018 - 2021
Revenue-based Payments	$50 million	Discounted Cash Flow	Discount Rate	11% - 15%
			Projected Year of Payment	2017 - 2026

8

Increases or decreases in the fair value of our contingent consideration liabilities can result from changes in discount periods and rates, as well as changes in the timing and amount of revenue estimates or in the timing or likelihood of achieving R&D, commercialization-based, and revenue-based milestones. Projected contingent payment amounts related to some of our R&D, commercialization-based, and revenue-based milestones are discounted back to the current period using a discounted cash flow model. Projected revenues are based on our most recent internal operational budgets and long-range strategic plans. Increases in projected revenues and probabilities of payment may result in higher fair value measurements. Increases in discount rates and the time to payment may result in lower fair value measurements. Increases or decreases in any of those inputs together, or in isolation, may result in a significantly lower or higher fair value measurement.

Strategic Investments

On November 1, 2017, we entered into a definitive agreement with an investee company where we may be obligated to pay $145 million in cash up-front and a maximum of $130 million in contingent payments to acquire the investee. The agreement contains a provision, expiring October 31, 2019, allowing the investee company to sell the remaining equity interests of the investee company to us upon achievement of a regulatory milestone, and an option allowing us to acquire the remaining equity interests.

We account for certain of our strategic investments as equity method investments, in accordance with FASB ASC Topic 323, Investments - Equity Method and Joint Ventures.

The aggregate carrying amount of our strategic investments were comprised of the following categories:

	As of
(in millions)	September 30, 2017		December 31, 2016
Equity method investments	$	204	$	265
Cost method investments	69		20
Available-for-sale securities	32		20
Notes receivable	44		42
	$	349	$	347

These investments are classified as other long-term assets within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies.

During the second quarter of 2017, we recorded a charge of $53 million for an other-than-temporary impairment loss equal to the difference between the carrying value of one of our investments and its fair value. The charge was recorded within the Other, net caption of our unaudited condensed consolidated statements of operations.

NOTE C – GOODWILL AND OTHER INTANGIBLE ASSETS

The gross carrying amount of goodwill and other intangible assets and the related accumulated amortization for intangible assets subject to amortization and accumulated write-offs of goodwill are as follows:

	As of
	September 30, 2017					December 31, 2016
	Gross Carrying		Accumulated Amortization/			Gross Carrying		Accumulated Amortization/
(in millions)	Amount		Write-offs			Amount		Write-offs
Amortizable intangible assets
Technology-related	$	9,388	$	(4,774	)	$	9,123	$	(4,468	)
Patents	514		(375		)	529		(374		)
Other intangible assets	1,625		(807		)	1,583		(722		)
	$	11,527	$	(5,956	)	$	11,235	$	(5,564	)
Unamortizable intangible assets
Goodwill	$	16,782	$	(9,900	)	$	16,578	$	(9,900	)
In-process research and development (IPR&D)	92		—			92		—
Technology-related	120		—			120		—
	$	16,994	$	(9,900	)	$	16,790	$	(9,900	)

9

Our technology-related intangible assets that are not subject to amortization represent technical processes, intellectual property and/or institutional understanding acquired through business combinations that are fundamental to the on-going operations of our business and have no limit to their useful life. Our technology-related intangible assets that are not subject to amortization are comprised primarily of certain acquired balloon and other technology, which is foundational to our continuing operations within the Cardiovascular market and other markets within interventional medicine. We assess our indefinite-lived intangible assets at least annually for impairment and reassess their classification as indefinite-lived assets. We assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that our indefinite-lived intangible assets are impaired. If we conclude that it is more likely than not that the asset is impaired, we then determine the fair value of the intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying value in accordance with FASB ASC Topic 350, Intangibles - Goodwill and Other.

In the third quarter of 2017, we performed our annual impairment test of all IPR&D projects and our indefinite-lived core technology assets and determined that the assets were not impaired. In addition, we verified the classification as indefinite-lived assets continues to be appropriate.

The following represents our goodwill balance by global reportable segment:

(in millions)	Cardiovascular		Rhythm Management		MedSurg		Total
Balance as of December 31, 2016	$	3,513	$	290	$	2,875	$	6,678
Impact of foreign currency fluctuations and other changes in carrying amount	11		1		1		13
Goodwill acquired	191		—		—		191
Balance as of September 30, 2017	$	3,715	$	291	$	2,876	$	6,882

Goodwill Impairment Testing

We test our goodwill balances during the second quarter of each year for impairment, or more frequently if indicators are present or changes in circumstances suggest an impairment may exist. In the second quarter of 2017, we performed our annual goodwill impairment test for all of our reporting units and concluded the fair value of each reporting unit exceeded its carrying value.

The following is a rollforward of accumulated goodwill write-offs by global reportable segment:

(in millions)	Cardiovascular			Rhythm Management			MedSurg			Total
Accumulated write-offs as of December 31, 2016	$	(1,479	)	$	(6,960	)	$	(1,461	)	$	(9,900	)
Goodwill written off	—			—			—			—
Accumulated write-offs as of September 30, 2017	$	(1,479	)	$	(6,960	)	$	(1,461	)	$	(9,900	)

NOTE D – FAIR VALUE MEASUREMENTS

Derivative Instruments and Hedging Activities

We address market risk from changes in foreign currency exchange rates and interest rates through a risk management program which includes the use of derivative financial instruments. We operate this program pursuant to documented corporate risk management policies and do not enter into derivative transactions for speculative purposes. Our derivative instruments do not subject our earnings or cash flows to material risk as the gains or losses on these derivatives generally offset losses or gains recognized on the hedged item. We manage our concentration of counterparty credit risk by limiting acceptable counterparties to major financial institutions with investment grade credit ratings, limiting the amount of credit exposure to individual counterparties and by actively monitoring counterparty credit ratings and the amount of individual credit exposure. We also employ master netting arrangements that limit the risk of counterparty non-payment on a particular settlement date to the net gain that would have otherwise been received from the counterparty. Although not completely eliminated, we do not consider the risk of counterparty default to be significant as a result of these protections. Further, none of our derivative instruments are subject to collateral or other security arrangements, nor do they contain provisions that are dependent on our credit ratings from any credit rating agency.

10

The success of our risk management program depends, in part, on forecasted transactions denominated primarily in British pound sterling, Euro and Japanese yen. We may experience unanticipated currency exchange gains or losses to the extent the actual activity is different than forecasted. In addition, changes in currency exchange rates related to any unhedged transactions may impact our earnings and cash flows.

Our risk from changes in currency exchange rates consists primarily of monetary assets and liabilities, forecasted intercompany and third-party transactions, and net investments in certain subsidiaries. We manage currency exchange rate risk at a consolidated level to reduce the cost of hedging by taking advantage of offsetting transactions. We employ derivative instruments, primarily forward currency contracts, to reduce the risk to our earnings and cash flows associated with changes in currency exchange rates.

Certain of our currency derivative instruments designated as cash flow hedges under FASB ASC Topic 815, Derivatives and Hedging are intended to protect the U.S. dollar value of forecasted transactions. The effective portion of gains or losses on a derivative instrument designated as a cash flow hedge is recorded in other comprehensive income (OCI), net of tax, until the underlying third-party transaction occurs. When the related third-party transaction occurs we recognize the gain or loss to earnings within the Cost of products sold caption of our unaudited condensed consolidated statements of operations. In the event the hedging relationship is no longer effective, or if the hedged forecasted transaction becomes no longer probable, we reclassify the amount of gains or losses on the derivative instrument designated as a cash flow hedge to earnings at that time.

We also use currency forward contracts that are not part of designated hedging relationships under FASB ASC Topic 815 as a part of our strategy to manage our exposure to currency exchange risk related to monetary assets and liabilities and related forecasted transactions. These currency forward contracts have an original time to maturity consistent with the hedged currency transaction exposures, generally less than one year and are marked-to-market with changes in fair value recorded to earnings and reflected within the Other, net caption of our unaudited condensed consolidated statements of operations.

Our interest rate risk relates primarily to U.S. dollar borrowings, partially offset by U.S. dollar cash investments. We use interest rate derivative instruments to manage our earnings and cash flow exposure to changes in interest rates. Under these agreements we and the counterparty, at specified intervals, exchange the difference between fixed and floating interest amounts calculated by reference to an agreed upon notional principal amount. We designate these derivative instruments either as fair value or cash flow hedges under FASB ASC Topic 815.

The changes in the fair value of interest rate derivatives designated as fair value hedges and the changes in the fair value of the underlying hedged debt instrument generally offset and are recorded within the Interest expense caption of our unaudited condensed consolidated statements of operations. To the extent the hedge relationship is effective, we record the changes in the fair value of interest rate derivatives designated as cash flow hedges within the Accumulated other comprehensive income, net of tax, caption of our unaudited condensed consolidated balance sheets until the underlying hedged item occurs, at which time we recognize the gain or loss within interest expense. We record the ineffective portion, if any, of our interest rate derivatives designated as cash flow hedges directly to earnings within interest expense and in the event the hedged cash flow does not occur, or it becomes no longer probable that it will occur we reclassify the amount of gains or losses to earnings at that time.

We are amortizing the realized gains or losses from interest rate derivative instruments previously designated as fair value hedges and the effective portion of gains or losses from interest rate derivative contracts previously designated as cash flow hedges into earnings as a component of interest expense over the remaining term of the hedged item, in accordance with FASB ASC Topic 815.

The following table presents the contractual amounts of our derivative instruments outstanding:

(in millions)	Topic 815 designation	As of
		September 30, 2017		December 31, 2016
Forward currency contracts	Cash flow hedge	$	3,218	$	2,271
Forward currency contracts	Non-designated	2,111		1,830
Total Notional Outstanding		$	5,329	$	4,101

The remaining time to maturity as of September 30, 2017 is within 60 months for all designated forward currency contracts and generally less than one year for all non-designated forward currency contracts. We had no interest rate derivative instruments outstanding as of September 30, 2017 and December 31, 2016.

11

The following presents the effect of our derivative instruments designated as cash flow hedges under FASB ASC Topic 815 on our accompanying unaudited condensed consolidated statements of operations:

(in millions)	Location in Unaudited Condensed Consolidated Statements of Operations	Effective Amount Recognized in OCI								Effective Amount Reclassified from OCI into Earnings
		Pre-Tax Gain (Loss)			Tax Benefit (Expense)		Gain (Loss) Net of Tax			Pre-Tax (Gain) Loss			Tax Benefit (Expense)		(Gain) Loss Net of Tax
Three Months Ended September 30, 2017
Forward currency contracts	Cost of products sold	$	(24	)	$	9	$	(15	)	$	(14	)	$	5	$	(9	)
Three Months Ended September 30, 2016
Forward currency contracts	Cost of products sold	$	(22	)	$	8	$	(14	)	$	(27	)	$	10	$	(17	)
Nine Months Ended September 30, 2017
Forward currency contracts	Cost of products sold	$	(88	)	$	32	$	(56	)	$	(68	)	$	25	$	(43	)
Interest rate derivative contracts	Interest expense	—			—		—			(1		)	—		(1		)
		$	(88	)	$	32	$	(56	)	$	(69	)	$	25	$	(44	)
Nine Months Ended September 30, 2016
Forward currency contracts	Cost of products sold	$	(180	)	$	65	$	(115	)	$	(107	)	$	38	$	(69	)

As of September 30, 2017, pre-tax net gains or losses for our derivative instruments designated, or previously designated, as currency hedge contracts under FASB ASC Topic 815 that may be reclassified to earnings within the next twelve months are presented below:

(in millions)	Location in Unaudited Condensed Consolidated Statements of Operations	Amount of Pre-Tax Gain (Loss) that may be Reclassified to Earnings
Fair value hedge contracts	Interest expense	$	12
Cash flow hedge contracts	Interest expense	1
Cash flow hedge contracts	Cost of products sold	(30		)

Net gains and losses on currency hedge contracts not designated as hedging instruments offset by net gains and losses from currency transaction exposures are presented below:

(in millions)	Location in Unaudited Condensed Consolidated Statements of Operations
		Three Months Ended						Nine Months Ended
		September 30,						September 30,
		2017			2016			2017			2016
Net gain (loss) on currency hedge contracts	Other, net	$	(13	)	$	(7	)	$	(25	)	$	(74	)
Net gain (loss) on currency transaction exposures	Other, net	9			1			13			64
Net currency exchange gain (loss)		$	(4	)	$	(6	)	$	(12	)	$	(10	)

Fair Value Measurements

FASB ASC Topic 815 requires all derivative instruments to be recognized at their fair values as either assets or liabilities on the balance sheet. We determine the fair value of our derivative instruments using the framework prescribed by FASB ASC Topic 820, Fair Value Measurements and Disclosures, by considering the estimated amount we would receive or pay to transfer these instruments at the reporting date when taking into account current currency exchange rates and interest rates, the creditworthiness of the counterparty for unrealized gain positions and our own creditworthiness for unrealized loss positions. In certain instances, we may utilize financial models to measure fair value of our derivative instruments. In doing so, we use inputs that include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, other observable inputs for the asset or liability, and inputs derived principally from, or corroborated by, observable market data by correlation or other means.

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The following are the balances of our derivative assets and liabilities:

	Location in Unaudited Condensed Consolidated Balance Sheets (1)	As of
		September 30,		December 31,
(in millions)		2017		2016
Derivative Assets:
Designated Derivative Instruments
Forward currency contracts	Other current assets	$	7	$	98
Forward currency contracts	Other long-term assets	59		65
		66		163
Non-Designated Derivative Instruments
Forward currency contracts	Other current assets	17		36
Total Derivative Assets		$	83	$	199
Derivative Liabilities:
Designated Derivative Instruments
Forward currency contracts	Other current liabilities	$	38	$	3
Forward currency contracts	Other long-term liabilities	25		4
		63		7
Non-Designated Derivative Instruments
Forward currency contracts	Other current liabilities	29		19
Total Derivative Liabilities		$	92	$	26

(1) We classify derivative assets and liabilities as current when the remaining term of the derivative contract is one year or less.

On a recurring basis, we measure certain financial assets and financial liabilities at fair value based upon quoted market prices, where available. Where quoted market prices or other observable inputs are not available, we apply valuation techniques to estimate fair value. FASB ASC Topic 820 establishes a three-level valuation hierarchy for disclosure of fair value measurements. The categorization of financial assets and financial liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy are defined as follows:

• Level 1 – Inputs to the valuation methodology are quoted market prices for identical assets or liabilities.

• Level 2 – Inputs to the valuation methodology are other observable inputs, including quoted market prices for similar assets or liabilities and market-corroborated inputs.

• Level 3 – Inputs to the valuation methodology are unobservable inputs based on management’s best estimate of inputs market participants would use in pricing the asset or liability at the measurement date, including assumptions about risk.

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Assets and liabilities measured at fair value on a recurring basis consist of the following:

	As of
	September 30, 2017								December 31, 2016
(in millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets
Money market and government funds	$	27	$	—	$	—	$	27	$	42	$	—	$	—	$	42
Available-for-sale securities	32		—		—		32		20		—		—		20
Forward currency contracts	—		83		—		83		—		199		—		199
	$	59	$	83	$	—	$	142	$	62	$	199	$	—	$	261
Liabilities
Forward currency contracts	$	—	$	92	$	—	$	92	$	—	$	26	$	—	$	26
Accrued contingent consideration	—		—		81		81		—		—		204		204
	$	—	$	92	$	81	$	173	$	—	$	26	$	204	$	230

Our investments in money market and government funds are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. These investments are classified as cash and cash equivalents within our accompanying unaudited condensed consolidated balance sheets, in accordance with U.S. GAAP and our accounting policies. In addition to $27 million invested in money market and government funds as of September 30, 2017, we had $183 million in interest bearing and non-interest bearing bank accounts. In addition to $42 million invested in money market and government funds as of December 31, 2016, we had $19 million in short-term deposits and $135 million in interest bearing and non-interest bearing bank accounts.

Our recurring fair value measurements using significant unobservable inputs (Level 3) relate solely to our contingent consideration liability. Refer to Note B – Acquisitions and Strategic Investmentsfor a discussion of the changes in the fair value of our contingent consideration liability.

We hold certain assets and liabilities that are measured at fair value on a non-recurring basis in periods subsequent to initial recognition. The fair value of a cost method investment is not estimated if there are no identified events or changes in circumstances that may have a significant adverse effect on the fair value of the investment. Refer to Note B – Acquisitions and Strategic Investments for a discussion of our strategic investments.

The fair value of our outstanding debt obligations was $6.032 billion as of September 30, 2017 and $5.739 billion as of December 31, 2016, which was determined by using quoted market prices for our publicly registered senior notes, classified as Level 1 within the fair value hierarchy. Refer to Note E – Borrowings and Credit Arrangements for a discussion of our debt obligations.

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NOTE E – BORROWINGS AND CREDIT ARRANGEMENTS

We had total debt of $5.682 billion as of September 30, 2017 and $5.484 billion as of December 31, 2016. The debt maturity schedule for the significant components of our long-term debt obligations is presented below:

in millions, except interest rates	Maturity Date	As of
		September 30, 2017			December 31, 2016
January 2017 5.125% Notes	January 2017	$	—		$	250
October 2018 2.650% Notes	October 2018	600			600
January 2020 6.000% Notes	January 2020	850			850
May 2020 2.850% Notes	May 2020	600			600
May 2022 3.375% Notes	May 2022	500			500
May 2025 3.850% Notes	May 2025	750			750
October 2023 4.125% Notes	October 2023	450			450
November 2035 6.250% Notes	November 2035	350			350
January 2040 7.375% Notes	January 2040	300			300
August 2018 Term Loan	August 2018	—			150
August 2020 Term Loan	2018 - 2020	—			600
Debt Discount	2018 - 2040	(7		)	(8		)
Deferred Financing Costs	2018 - 2040	(20		)	(24		)
Interest Rate Swaps	2020 - 2023	42			51
Capital Lease Obligation	2018 - 2020	1			1
Long-term debt		$	4,416		$	5,420

Note: The table above does not include unamortized amounts related to interest rate contracts designated as cash flow hedges.

Revolving Credit Facility

On August 4, 2017, we entered into a $2.250 billion revolving credit facility (the 2017 Facility) with a global syndicate of commercial banks and terminated our previous $2.000 billion revolving credit facility (the 2015 Facility), which was scheduled to mature April 2020. The 2017 Facility matures on August 4, 2022. Eurodollar and multicurrency loans under the 2017 Facility bear interest at LIBOR plus an interest margin of between 0.90 percent and 1.50 percent, based on our corporate credit ratings and consolidated leverage ratio (1.10 percent as of September 30, 2017). Under the credit agreement for the 2017 Facility (the 2017 Credit Agreement), we are required to pay a facility fee (0.15 percent as of September 30, 2017) based on our credit ratings and the total amount of revolving credit commitment, regardless of usage of the 2017 Facility. This facility provides backing for the commercial paper program described below. There were no borrowings outstanding under the 2017 Facility as of September 30, 2017 and no borrowings outstanding under the 2015 Facility as of December 31, 2016.

The 2017 Facility agreement in place requires that we maintain certain financial covenants, as follows:

	Covenant Requirement as of September 30, 2017	Actual as of September 30, 2017
Maximum leverage ratio (1)	3.5 times	2.3 times

(1) Ratio of total debt to consolidated EBITDA, as defined by the credit agreement, for the preceding four consecutive fiscal quarters.

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The 2017 Credit Agreement provides for an exclusion from the calculation of consolidated EBITDA, as defined by such agreement, through the agreed maturity, of any non-cash charges and up to $500 million in restructuring charges and restructuring-related expenses related to our current or future restructuring plans. As of September 30, 2017, we had $476 million of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the 2017 Credit Agreement, are excluded from the calculation of consolidated EBITDA and any new debt issued to fund any tax deficiency payments is excluded from consolidated total debt, as defined in the 2017 Credit Agreement, provided that the sum of any excluded net cash litigation payments and any new debt issued to fund any tax deficiency payments does not exceed $2.624 billion in the aggregate. As of September 30, 2017, we had $2.358 billion of the combined legal and debt exclusion remaining.

As of and through September 30, 2017, we were in compliance with the required covenants.

Any inability to maintain compliance with these covenants could require us to seek to renegotiate the terms of our credit facility or seek waivers from compliance with these covenants, both of which could result in additional borrowing costs. Further, there can be no assurance that our lenders would agree to such new terms or grant such waivers.

Commercial Paper

In June 2017, we launched a commercial paper program that allowed the Company to have a maximum of $2.000 billion in commercial paper outstanding. In August 2017, we increased our commercial paper program’s maximum to $2.250 billion, in line with the increased size of the 2017 Facility. As of September 30, 2017 there was $1.260 billion of commercial paper outstanding. The commercial paper program is backed by the 2017 Facility. Commercial paper issued as of September 30, 2017 had a weighted average maturity of 29 days and a weighted average yield of 1.65 percent.

Term Loans

As of September 30, 2017, we had no amounts outstanding under our unsecured term loan facilities and$750 million outstanding as of December 31, 2016. These facilities include an unsecured term loan facility maturing August 2018 (August 2018 Term Loan) and an unsecured term loan facility maturing August 2020 (August 2020 Term Loan). The August 2018 Term Loan had $150 million outstanding as of December 31, 2016 and was fully repaid as of June 30, 2017. The August 2020 Term Loan had $600 million outstanding as of December 31, 2016 and was fully repaid as of September 30, 2017.

Senior Notes

We had senior notes outstanding of $4.400 billion as ofSeptember 30, 2017 and$4.650 billion as of December 31, 2016. On January 12, 2017, we used our existing credit facilities to repay the $250 million plus interest of our senior notes due in January 2017.Our senior notes were issued in public offerings, are redeemable prior to maturity and are not subject to any sinking fund requirements. Our senior notes are unsecured, unsubordinated obligations and rank on parity with each other. These notes are effectively junior to borrowings under our credit and security facility and to the extent borrowed by our subsidiaries, to liabilities of our subsidiaries (see Other Arrangements below).

Other Arrangements

As ofDecember 31, 2016, we maintained a$300 million credit and security facility secured by our U.S. trade receivables maturing on June 9, 2017. On February 7, 2017, we amended the terms of this credit and security facility, including increasing the facility size to$400 millionand extending the facility maturity date to February 2019. We had no borrowings outstanding under this facility as of September 30, 2017 and $60 million as of December 31, 2016.

We have accounts receivable factoring programs in certain European countries that we account for as sales under FASB ASC Topic 860, Transfers and Servicing. These agreements provide for the sale of accounts receivable to third parties, without recourse, of up to $449 million as of September 30, 2017. We have no retained interests in the transferred receivables, other than collection and administrative responsibilities and, once sold, the accounts receivable are no longer available to satisfy creditors in the event of bankruptcy. We de-recognized $167 million of receivables as of September 30, 2017 at an average interest rate of 1.6 percent and $152 million as of December 31, 2016 at an average interest rate of 1.8 percent.

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In addition, we have uncommitted credit facilities with a commercial Japanese bank that provide for borrowings, promissory notes discounting and receivables factoring of up to 22.0 billion Japanese yen (approximately $196 million as of September 30, 2017). We de-recognized $162 million of notes receivable and factored receivables as of September 30, 2017 at an average interest rate of 1.3 percent and $149 million of notes receivable as of December 31, 2016 at an average interest rate of 1.6 percent. De-recognized accounts and notes receivable are excluded from trade accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets.

We had outstanding letters of credit of $37 million as of September 30, 2017 and $44 million as of December 31, 2016, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of September 30, 2017 and December 31, 2016, none of the beneficiaries had drawn upon the letters of credit or guarantees; accordingly, we did not recognize a related liability for our outstanding letters of credit in our consolidated balance sheets as of September 30, 2017 or December 31, 2016. We believe we will generate sufficient cash from operations to fund these arrangements and intend to fund these arrangements without drawing on the letters of credit.

As of and through September 30, 2017, we were in compliance with all the required covenants related to our debt obligations. For additional information regarding the terms of our debt agreements, refer to Note F - Borrowings and Credit Arrangements of the consolidated financial statements in our most recent Annual Report on Form 10-K.

NOTE F – RESTRUCTURING-RELATED ACTIVITIES

2016 Restructuring Plan

On June 6, 2016, our Board of Directors approved and we committed to a restructuring initiative (the 2016 Restructuring Plan). The 2016 Restructuring Plan is intended to develop global commercialization, technology and manufacturing capabilities in key growth markets, build on our Plant Network Optimization (PNO) strategy, which is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities and expanding operational efficiencies in support of our operating income margin goals. Key activities under the 2016 Restructuring Plan include strengthening global infrastructure through evolving global real estate assets and workplaces, developing global commercial and technical competencies, enhancing manufacturing and distribution expertise in certain regions and continuing implementation of our ongoing PNO strategy. These activities were initiated in the second quarter of 2016 and are expected to be substantially completed by the end of 2018.

The 2016 Restructuring Plan is expected to result in total pre-tax charges of approximately $175 million to $225 million and approximately $160 million to $210 million of these charges are estimated to result in cash outlays. We have recorded related costs of $108 million since the inception of the plan through September 30, 2017 and recorded a portion of these expenses as restructuring charges and the remaining portion through other lines within our consolidated statements of operations.

The following table provides a summary of our estimates of costs associated with the 2016 Restructuring Plan through the end of 2018 by major type of cost:

Type of cost	Total Estimated Amount Expected to be Incurred
Restructuring charges:
Termination benefits	$65 million to $75 million
Other (1)	$5 million to $15 million
Restructuring-related expenses:
Other (2)	$105 million to $135 million
	$175 million to $225 million

(1) Consists primarily of consulting fees and costs associated with contract cancellations.

(2) Comprised of other costs directly related to the 2016 Restructuring Plan, including program management, accelerated depreciation and costs to transfer product lines among facilities.

We recorded restructuring charges pursuant to our restructuring plans of $12 million in the third quarter of 2017, $5 million in the third quarter of 2016, $17 million in the first nine months of2017 and $22 million in the first nine months of2016. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of $14 million in the third quarter of 2017, $12 million in the third quarter of 2016, $44 million in the first nine months of2017 and $33 million in the first nine months of2016.

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The following presents these costs (credits) by major type and line item within our accompanying unaudited condensed consolidated statements of operations:

Three Months Ended September 30, 2017
(in millions)	Termination Benefits		Accelerated Depreciation		Transfer Costs		Other		Total
Restructuring charges	$	11	$	—	$	—	$	1	$	12
Restructuring-related expenses:
Cost of products sold	—		—		11		—		11
Selling, general and administrative expenses	—		2		—		1		3
	—		2		11		1		14
	$	11	$	2	$	11	$	2	$	26

All charges incurred in the third quarter of 2017 were related to the 2016 Restructuring Plan.

Three Months Ended September 30, 2016
(in millions)	Termination Benefits		Transfer Costs		Fixed Asset Write-offs		Other		Total
Restructuring charges	$	1	$	—	$	2	$	2	$	5
Restructuring-related expenses:
Cost of products sold	—		8		—		—		8
Selling, general and administrative expenses	—		—		—		4		4
	—		8		—		4		12
	$	1	$	8	$	2	$	6	$	17
(in millions)	Termination Benefits		Transfer Costs		Fixed Asset Write-offs		Other		Total
2016 Restructuring Plan	$	1	$	3	$	—	$	3	$	7
2014 Restructuring Plan	—		5		2		3		10
	$	1	$	8	$	2	$	6	$	17

Nine Months Ended September 30, 2017
(in millions)	Termination Benefits		Accelerated Depreciation		Transfer Costs		Other		Total
Restructuring charges	$	14	$	—	$	—	$	3	$	17
Restructuring-related expenses:
Cost of products sold	—		—		35		—		35
Selling, general and administrative expenses	—		5		—		4		9
	—		5		35		4		44
	$	14	$	5	$	35	$	7	$	61

All charges incurred in the first nine months of2017 were related to the 2016 Restructuring Plan.

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Nine Months Ended September 30, 2016
(in millions)	Termination Benefits			Accelerated Depreciation		Transfer Costs		Fixed Asset Write-offs		Other		Total
Restructuring charges	$	16		$	—	$	—	$	2	$	4	$	22
Restructuring-related expenses:
Cost of products sold	—			—		20		—		—		20
Selling, general and administrative expenses	—			4		—		—		9		13
	—			4		20		—		9		33
	$	16		$	4	$	20	$	2	$	13	$	55
(in millions)	Termination Benefits			Accelerated Depreciation		Transfer Costs		Fixed Asset Write-offs		Other		Total
2016 Restructuring Plan	$	19		$	—	$	4	$	—	$	2	$	25
2014 Restructuring Plan	(3		)	4		16		2		11		30
	$	16		$	4	$	20	$	2	$	13	$	55

Termination benefits represent amounts incurred pursuant to our ongoing benefit arrangements and amounts for “one-time” involuntary termination benefits and have been recorded in accordance with FASB ASC Topic 712,Compensation - Nonretirement Postemployment Benefits and FASBASC Topic 420,Exit or Disposal Cost Obligations. Other restructuring costs, which represent primarily consulting fees and costs related to contract cancellations, are being recorded as incurred in accordance with FASB ASC Topic 420. Accelerated depreciation is being recorded over the adjusted remaining useful life of the related assets and program management and production line transfer costs are being recorded as incurred.

As of September 30, 2017, we incurred cumulative restructuring charges related to our 2016 Restructuring Plan of $45 million and restructuring-related charges of $63 million since we committed to the plan. The following presents these costs by major type:

(in millions)	2016 Restructuring Plan
Termination benefits	$	38
Other	7
Total restructuring charges	45
Accelerated depreciation	7
Transfer costs	50
Other	6
Restructuring-related expenses	63
	$	108

We made cash payments of $51 million in the first nine months of2017 associated with our 2016 Restructuring Plan, and as of September 30, 2017, we had made total cash payments of $78 million related to our 2016 Restructuring Plan since committing to the plan. These payments were made using cash generated from operations and are comprised of the following:

(in millions)	2016 Restructuring Plan
Nine Months Ended September 30, 2017
Termination benefits	$	12
Transfer costs	35
Other	4
	$	51
Program to Date
Termination benefits	$	20
Transfer costs	50
Other	8
	$	78

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Our restructuring liability is primarily comprised of accruals for termination benefits. The following is a rollforward of the termination benefit liability associated with our 2016 Restructuring Plan, which is reported as a component of accrued expenses included in our accompanying unaudited condensed consolidated balance sheets:

(in millions)	2016 Restructuring Plan
Accrued as of December 31, 2016	$	16
Charges (credits)	14
Cash payments	(12		)
Accrued as of September 30, 2017	$	18

In addition to our accrual for termination benefits, we had an $8 million liability as of September 30, 2017 and $6 million as of December 31, 2016 for other restructuring-related items.

NOTE G – SUPPLEMENTAL BALANCE SHEET INFORMATION

Components of selected captions in our accompanying unaudited condensed consolidated balance sheets are as follows:

Trade accounts receivable, net

	As of
(in millions)	September 30, 2017			December 31, 2016
Accounts receivable	$	1,580		$	1,579
Less: allowance for doubtful accounts	(81		)	(73		)
Less: allowance for sales returns	(29		)	(34		)
	$	1,470		$	1,472

The following is a rollforward of our allowance for doubtful accounts:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in millions)	2017			2016			2017			2016
Beginning balance	$	74		$	80		$	73		$	75
Net charges to expenses	9			(1		)	14			5
Utilization of allowances	(2		)	(4		)	(6		)	(5		)
Ending balance	$	81		$	75		$	81		$	75

Inventories

	As of
(in millions)	September 30, 2017		December 31, 2016
Finished goods	$	674	$	625
Work-in-process	108		94
Raw materials	295		236
	$	1,077	$	955

Other current assets

	As of
(in millions)	September 30, 2017		December 31, 2016
Prepaid expenses	$	72	$	58
Restricted cash	449		243
Other	124		240
	$	645	$	541

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Property, plant and equipment, net

	As of
(in millions)	September 30, 2017		December 31, 2016
Land	$	93	$	91
Buildings and improvements	1,056		981
Equipment, furniture and fixtures	3,139		2,955
Capital in progress	297		338
	4,585		4,365
Less: accumulated depreciation	2,907		2,735
	$	1,678	$	1,630

Depreciation expense was $71 million for the third quarter of 2017, $67 million for the third quarter of 2016, $198 million for the first nine months of2017 and $193 million for the first nine months of2016.

Accrued expenses

	As of
(in millions)	September 30, 2017		December 31, 2016
Legal reserves	$	1,355	$	1,062
Payroll and related liabilities	560		572
Accrued contingent consideration	28		63
Other	608		615
	$	2,551	$	2,312

Other long-term liabilities

	As of
(in millions)	September 30, 2017		December 31, 2016
Accrued income taxes	$	842	$	781
Legal reserves	335		961
Accrued contingent consideration	53		141
Other	508		455
	$	1,738	$	2,338

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Accrued warranties

We offer warranties on certain of our product offerings. The majority of our warranty liability relates to implantable devices offered by our Cardiac Rhythm Management (CRM) business, which include defibrillator and pacemaker systems. Our CRM products come with a standard limited warranty covering the replacement of these devices. We offer a full warranty for a portion of the period post-implant and a partial warranty for a period of time thereafter. We estimate the costs that we may incur under our warranty programs based on the number of units sold, historical and anticipated rates of warranty claims and cost per claim and record a liability equal to these estimated costs as cost of products sold at the time the product sale occurs. We reassess the adequacy of our recorded warranty liabilities on a quarterly basis and adjust these amounts as necessary. The current portion of our warranty accrual is included in other accrued expenses in the table above and the non-current portion of our warranty accrual is included in other long-term liabilities in the table above. Changes in our product warranty accrual consisted of the following:

	Nine Months Ended September 30,
(in millions)	2017			2016
Beginning Balance	$	22		$	23
Provision	20			16
Settlements/reversals	(18		)	(19		)
Ending Balance	$	24		$	20

NOTE H – INCOME TAXES

Our effective tax rate from continuing operations is presented below:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2017		2016		2017		2016
Effective tax rate from continuing operations	8.5	%	11.2	%	(2.0	)%	(152.4	)%

The change in our reported tax rates for the third quarter and first nine months of2017, as compared to the same periods in 2016, relates primarily to the impact of certain receipts and charges that are taxed at different rates than our effective tax rate, including intangible asset impairment charges, acquisition-related items, restructuring and restructuring-related items, investment impairment-related items, litigation-related items and amortization expense, as well as the impact of certain discrete tax items.

As of September 30, 2017, we had $1.128 billion of gross unrecognized tax benefits, of which a net $1.039 billion, if recognized, would affect our effective tax rate. As of December 31, 2016, we had $1.095 billion of gross unrecognized tax benefits, of which a net $1.006 billion, if recognized, would affect our effective tax rate.

We have received Notices of Deficiency from the Internal Revenue Service (IRS) reflecting proposed audit adjustments for Guidant Corporation for its 2001 through 2006 tax years and for Boston Scientific Corporation for its 2006 and 2007 tax years. The total incremental tax liability asserted by the IRS for the applicable periods is $1.162 billion plus interest. The primary issue in dispute for all years is the transfer pricing associated with the technology license agreements between domestic and foreign subsidiaries of Guidant. In addition, the IRS has proposed adjustments in connection with the financial terms of our Transaction Agreement with Abbott Laboratories pertaining to the sale of Guidant's vascular intervention business to Abbott in April 2006. During 2014, we received a Revenue Agent Report from the IRS reflecting significant proposed audit adjustments to our 2008, 2009 and 2010 tax years based upon the same transfer pricing methodologies that the IRS applied to our 2001 through 2007 tax years.

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We do not agree with the transfer pricing methodologies applied by the IRS or its resulting assessment. We have filed petitions with the U.S. Tax Court (Tax Court) contesting the Notices of Deficiency for the 2001 through 2007 tax years in challenge and submitted a letter to the IRS Office of Appeals (IRS Appeals) protesting the Revenue Agent Report for the 2008 through 2010 tax years and requesting an administrative appeal hearing. The issues in dispute were scheduled to be heard in Tax Court in late July 2016. On July 19, 2016, we entered into a Stipulation of Settled Issues with the IRS intended to resolve all of the aforementioned transfer pricing issues, as well as the issues related to our transaction with Abbott, for the 2001 through 2007 tax years. The Stipulation of Settled Issues is contingent upon IRS Office of Appeals applying the same basis of settlement to all transfer pricing issues for the Company’s 2008, 2009 and 2010 tax years as well as review by the United States Congress Joint Committee on Taxation. In October 2016, we reached an agreement in principle with the IRS Appeals as to the resolution of transfer pricing issues in 2008, 2009 and 2010 tax years, subject to additional calculations of tax as well as documentation to memorialize our agreement.

In the event that the conditions in the Stipulation of Settled Items are satisfied, we expect to make net tax payments of approximately $275 million, plus interest, through the date of payment. If finalized, payments related to the resolution are expected in the next nine months. We believe that our income tax reserves associated with these matters are adequate as of September 30, 2017 and we do not expect to recognize any additional charges related to the resolution of this controversy. However, the final resolution of these issues is contingent and if the Stipulation of Settled Issues is not finalized, it could have a material impact on our financial condition, results of operations, or cash flows.

We recognize interest and penalties related to income taxes as a component of income tax expense. We had $633 million accrued for gross interest and penalties as of September 30, 2017 and $572 million as of December 31, 2016. We recognized net tax expense related to interest and penalties of $14 million during the third quarter of 2017 and $13 million in the third quarter of 2016, $40 million during the first nine months of2017 and $35 million during the first nine months of2016.

It is reasonably possible that within the next 12 months we will resolve multiple issues including transfer pricing and transactional-related issues with foreign, federal and state taxing authorities, in which case we could record a reduction in our balance of unrecognized tax benefits of up to approximately $757 million.

NOTE I – COMMITMENTS AND CONTINGENCIES

The medical device market in which we primarily participate is largely technology driven. As a result, intellectual property rights, particularly patents and trade secrets, play a significant role in product development and differentiation. Over the years, there has been litigation initiated against us by others, including our competitors, claiming that our current or former product offerings infringe patents owned or licensed by them. Intellectual property litigation is inherently complex and unpredictable. In addition, competing parties frequently file multiple suits to leverage patent portfolios across product lines, technologies and geographies and to balance risk and exposure between the parties. In some cases, several competitors are parties in the same proceeding or in a series of related proceedings or litigate multiple features of a single class of devices. These forces frequently drive settlement not only for individual cases, but also for a series of pending and potentially related and unrelated cases. Although monetary and injunctive relief is typically sought, remedies and restitution are generally not determined until the conclusion of the trial court proceedings and can be modified on appeal. Accordingly, the outcomes of individual cases are difficult to time, predict or quantify and are often dependent upon the outcomes of other cases in other geographies.

During recent years, we successfully negotiated closure of several long-standing legal matters and have received favorable rulings in several other matters, however, there continues to be outstanding intellectual property litigation. Adverse outcomes in one or more of these matters could have a material adverse effect on our ability to sell certain products and on our operating margins, financial position, results of operations and/or liquidity.

In the normal course of business, product liability, securities and commercial claims are asserted against us. Similar claims may be asserted against us in the future related to events not known to management at the present time. We maintain an insurance policy providing limited coverage against securities claims and we are substantially self-insured with respect to product liability claims and fully self-insured with respect to intellectual property infringement claims. The absence of significant third-party insurance coverage increases our potential exposure to unanticipated claims or adverse decisions. Product liability claims, securities and commercial litigation and other legal proceedings in the future, regardless of their outcome, could have a material adverse effect on our financial position, results of operations and/or liquidity.

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In addition, like other companies in the medical device industry, we are subject to extensive regulation by national, state and local government agencies in the United States and other countries in which we operate. From time to time we are the subject of qui tam actions and governmental investigations often involving regulatory, marketing and other business practices. These qui tam actions and governmental investigations could result in the commencement of civil and criminal proceedings, substantial fines, penalties and administrative remedies and have a material adverse effect on our financial position, results of operations and/or liquidity.

In accordance with FASB ASC Topic 450, Contingencies, we accrue anticipated costs of settlement, damages, losses for product liability claims and, under certain conditions, costs of defense, based on historical experience or to the extent specific losses are probable and estimable. Otherwise, we expense these costs as incurred. If the estimate of a probable loss is a range and no amount within the range is more likely, we accrue the minimum amount of the range.

Our accrual for legal matters that are probable and estimable was $1.690 billion as of September 30, 2017 and $2.023 billion as of December 31, 2016 and includes certain estimated costs of settlement, damages and defense. The net litigation-related charges recorded in the first nine months of 2017 and 2016 primarily include amounts related to transvaginal surgical mesh product liability cases and claims. We continue to assess certain litigation and claims to determine the amounts, if any, that management believes will be paid as a result of such claims and litigation and, therefore, additional losses may be accrued and paid in the future, which could materially adversely impact our operating results, cash flows and/or our ability to comply with our debt covenants.

In management's opinion, we are not currently involved in any legal proceedings other than those disclosed in our most recent Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q for the Quarters ended March 31, 2017 and June 30, 2017, and those specifically identified below, which, individually or in the aggregate, could have a material adverse effect on our financial condition, operations and/or cash flows. Unless included in our legal accrual or otherwise indicated below, a range of loss associated with any individual material legal proceeding cannot be estimated.

Patent Litigation

On May 19, 2005, G. David Jang, M.D. filed suit against us alleging breach of contract relating to certain patent rights covering stent technology. The suit was filed in the U.S. District Court for the Central District of California seeking monetary damages and rescission of contract. After a Markman ruling relating to the Jang patent rights, Dr. Jang stipulated to the dismissal of certain claims alleged in the complaint with a right to appeal and the parties subsequently agreed to settle the other claims. In May 2007, Dr. Jang filed an appeal with respect to the remaining patent claims and in July 2008, the Court of Appeals vacated the District Court's consent judgment and remanded the case back to the District Court for further clarification. In August 2011, the District Court entered a stipulated judgment that we did not infringe the Jang patent. Dr. Jang filed an appeal on September 21, 2011 and on August 22, 2012, the Court of Appeals vacated the District Court's judgment and remanded the case to the District Court for further proceedings. On July 8, 2015, a jury found that our Express™ Stent family did not literally infringe a Jang patent, but that the stents infringed under the doctrine of equivalents. The court reserved judgment until the conclusion of further proceedings related to the doctrine of equivalents finding. On September 29, 2015, the court ruled that our Express™ Stent family did not infringe under the doctrine of equivalents and, on October 30, 2015, the court entered judgment in our favor. On November 25, 2015, Dr. Jang filed a motion for judgment as a matter of law on literal infringement and/or for a new trial. On February 3, 2016, the court denied Dr. Jang’s motion for a new trial and judgment as a matter of law. Dr. Jang filed a notice of appeal. On September 29, 2017, the United States Court of Appeals for the Federal Circuit affirmed the judgment that our Express Stent did not infringe the Jang patents and the Company did not owe Dr. Jang any payments.

On April 19, 2016, a subsidiary of Boston Scientific filed suit against Edwards Lifesciences Corporation in the United States District Court for the Central District of California for patent infringement. We allege that Edwards’ aortic valve delivery systems infringe eight of our catheter related patents. On October 13, 2016, Edwards filed a petition for inter partes review of one asserted patent with the USPTO, Patent Trial and Appeal Board. On April 21, 2017, the USPTO denied the petition. On April 19 and 20, 2017, Edwards filed multiple inter partes review petitions against the patents in suit. On September 8, 2017, the court granted a stay of the action pending an inter partes review of the patents in suit.

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Product Liability Litigation

As of October 25, 2017, approximately 48,500 product liability cases or claims related to transvaginal surgical mesh products designed to treat stress urinary incontinence and pelvic organ prolapse have been asserted against us. The pending cases are in various federal and state courts in the United States and include eight putative class actions. There were also approximately 20 cases in Canada, inclusive of one certified and three putative class actions, and fewer than 25 claims in the United Kingdom. Generally, the plaintiffs allege personal injury associated with use of our transvaginal surgical mesh products. The plaintiffs assert design and manufacturing claims, failure to warn, breach of warranty, fraud, violations of state consumer protection laws and loss of consortium claims. Over 3,100 of the cases have been specially assigned to one judge in state court in Massachusetts. On February 7, 2012, the Judicial Panel on Multi-District Litigation (MDL) established MDL-2326 in the United States District Court for the Southern District of West Virginia and transferred the federal court transvaginal surgical mesh cases to MDL-2326 for coordinated pretrial proceedings. During the fourth quarter of 2013, we received written discovery requests from certain state attorneys general offices regarding our transvaginal surgical mesh products. We have responded to those requests. As of October 25, 2017, we have entered into master settlement agreements in principle or are in final stages of entering one with certain plaintiffs' counsel to resolve an aggregate of approximately 44,000 cases and claims. These master settlement agreements provide that the settlement and distribution of settlement funds to participating claimants are conditional upon, among other things, achieving minimum required claimant participation thresholds. Of the approximately 44,000 cases and claims, approximately 15,500 have met the conditions of the settlement and are final. All settlement agreements were entered into solely by way of compromise and without any admission or concession by us of any liability or wrongdoing.

We have established a product liability accrual for known and estimated future cases and claims asserted against us as well as with respect to the actions that have resulted in verdicts against us and the costs of defense thereof associated with our transvaginal surgical mesh products. While we believe that our accrual associated with this matter is adequate, changes to this accrual may be required in the future as additional information becomes available. While we continue to engage in discussions with plaintiffs’ counsel regarding potential resolution of pending cases and claims and intend to vigorously contest the cases and claims asserted against us that do not settle, the final resolution of the cases and claims is uncertain and could have a material impact on our results of operations, financial condition and/or liquidity. Initial trials involving our transvaginal surgical mesh products have resulted in both favorable and unfavorable judgments for us. We do not believe that the judgment in any one trial is representative of potential outcomes of all cases or claims related to our transvaginal surgical mesh products.

Governmental Investigations and Qui Tam Matters

On May 5, 2014, we were served with a subpoena from the United States Department of Health and Human Services, Office of the Inspector General. The subpoena seeks information relating to the launch of the Cognis™ and Teligen™ line of devices in 2008, the performance of those devices from 2007 to 2009 and the operation of the Physician Guided Learning Program. We are cooperating with this request. On May 6, 2016, a qui tam lawsuit in this matter was unsealed in the United States District Court for the District of Minnesota. At the same time, we learned that the U.S. government and the State of California had earlier declined to intervene in that lawsuit on April 15, 2016. The complaint was served on us on July 21, 2016. On October 7, 2016, the plaintiff/relator served an amended complaint that dropped the allegations relating to the Physician Guided Learning Program. We filed a motion to dismiss the amended complaint on December 7, 2016 and the court heard our motion to dismiss on April 5, 2017. On August 29, 2017, the Court granted the motion to dismiss, without prejudice, and on September 19, 2017, the relator filed a Second Amended Complaint.

Other Proceedings

In June of 2016, Guidant asserted three arbitrations claims, two of which remain pending, related to three insurance policies for indemnity arising out of previously incurred and satisfied liabilities tied to allegedly defective cardiac rhythm management devices, which Guidant had manufactured. Guidant has claimed indemnities against such liabilities under insurance policies which it purchased for the 2004 policy year. One of these claims was resolved in September 2017.

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Matters Concluded Since December 31, 2016

On September 27, 2010, Boston Scientific Scimed, Inc., Boston Scientific Ltd., Endovascular Technologies, Inc. and we filed suit against Taewoong Medical, Co., Ltd., Standard Sci-Tech, Inc., EndoChoice, Inc. and Sewoon Medical Co., Ltd for infringement of three patents on stents for use in the GI system (the Pulnev and Hankh patents) and against Cook Medical Inc. (and related entities) for infringement of the same three patents and an additional patent (the Thompson patent). The suit was filed in the United States District Court for the District of Massachusetts seeking monetary damages and injunctive relief. In December 2010, we amended our complaint to add infringement of six additional Pulnev patents. In January 2011, the defendants filed a counterclaim of invalidity and unenforceability. In September 2011, we amended the complaint to add Chek-Med Systems d/b/a GI Supply as a defendant. On December 22, 2016 the following defendants were dismissed: Taewoong Medical Co., Ltd., GI Supply, Inc., Standard Sci-Tech, Inc., EndoChoice, Inc. and Sewoon Medical Co. The remaining parties reached a settlement and on March 21, 2017, the case was dismissed.

NOTE J – WEIGHTED AVERAGE SHARES OUTSTANDING

	Three Months Ended September 30,		Nine Months Ended September 30,
(in millions)	2017	2016	2017	2016
Weighted average shares outstanding - basic	1,372.0	1,360.6	1,369.1	1,356.1
Net effect of common stock equivalents	22.1	19.1	22.7	18.8
Weighted average shares outstanding - assuming dilution	1,394.1	1,379.7	1,391.8	1,374.9

The impact of stock options outstanding with exercise prices greater than the average fair market value of our common stock was immaterial for all periods presented.

We issued approximately two million shares of our common stock in the third quarter of 2017, three million shares of our common stock in the third quarter of 2016, 11 million shares of our common stock in the first nine months of2017 and 15 million shares of our common stock in the first nine months of2016, following the exercise of underlying stock options, vesting of deferred stock units or purchases under our employee stock purchase plan. We did not repurchase any shares of our common stock during the first nine months of2017 or 2016.

NOTE K – SEGMENT REPORTING

We have three reportable segments comprised of Cardiovascular, Rhythm Management and MedSurg, which represent an aggregation of our operating segments.

Each of our reportable segments generates revenue from the sale of medical devices. We measure and evaluate our reportable segments based on segment net sales and operating income, excluding the impact of changes in foreign currency. Sales generated from reportable segments, as well as operating results of reportable segments and corporate expenses, are calculated based on internally-derived standard currency exchange rates, which may differ from year to year and do not include intersegment profits.

We restated segment information for the prior period based on our internally-derived standard currency exchange rates as of January 1, 2017, used for the current period in order to remove the impact of foreign currency exchange fluctuation. We exclude from segment operating income certain corporate-related expenses and certain transactions or adjustments that our chief operating decision maker considers to be non-operational, such as intangible asset impairment charges, acquisition-related items, restructuring and restructuring-related items, litigation-related items and amortization expense. Although we exclude these amounts from segment operating income, they are included in reported consolidated operating income (loss) and are included in the reconciliation below.

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A reconciliation of the totals reported for the reportable segments to the applicable line items in our accompanying unaudited condensed consolidated statements of operations is as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(in millions)	2017		2016		2017		2016
			(restated)				(restated)
Net sales
Interventional Cardiology	$	589	$	565	$	1,806	$	1,705
Peripheral Interventions	268		256		812		764
Cardiovascular	857		821		2,618		2,469
Cardiac Rhythm Management	461		465		1,417		1,380
Electrophysiology	71		60		203		180
Rhythm Management	532		525		1,620		1,560