NOTE K – SEGMENT REPORTING

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

Each of our reportable segments generates revenues from the sale of medical devices. We measure and evaluate our reportable segments based on segment net sales and operating income, excluding intersegment profits. In 2017, we updated our presentation of segment net sales and operating income to include the impact of foreign currency fluctuations, since our chief operating decision maker (CODM) reviews operating results both including and excluding the impact of foreign currency fluctuations, and the following presentation more closely aligns to our unaudited condensed consolidated financial statements. We exclude from segment operating income certain corporate-related expenses and certain transactions or adjustments that our CODM considers to be non-operational, such as amounts related to amortization expense, intangible asset impairment charges, acquisition-related items, restructuring and restructuring-related items and litigation-related items. Although we exclude these amounts from segment operating income, they are included in reported Income (loss) before income taxes on the unaudited condensed consolidated statements of operations and are included in the reconciliation below.

Effective January 1, 2018, following organizational changes to align our business and organization structure focused on active implantable devices, we revised our reportable segments, in accordance with FASB ASC Topic 280, Segment Reporting. The revision reflects a reclassification of our Neuromodulation business from our MedSurg segment to our newly created Rhythm and Neuro segment. We have revised prior year amounts to conform to the current year’s presentation (as denoted with an asterisk throughout *). There was no revision to operating segments or reporting units as a result of the organizational change.

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)	2018			2017			2018			2017

Net sales
MedSurg*	$	746		$	676		$	2,207		$	1,997
Rhythm and Neuro*	740			689			2,252			2,057
Cardiovascular	908			857			2,806			2,586
	$	2,393		$	2,222		$	7,262		$	6,640

Income (loss) before income taxes
MedSurg*	$	274		$	248		$	807		$	707
Rhythm and Neuro*	168			126			481			372
Cardiovascular	268			239			858			733
Operating income allocated to reportable segments	710			613			2,146			1,813
Corporate expenses, including hedging activities	(97		)	(55		)	(297		)	(172		)
Intangible asset impairment charges, acquisition-related, restructuring- and restructuring-related and litigation-related net (charges) credits	(77		)	(42		)	(225		)	(250		)
Amortization expense	(148		)	(139		)	(437		)	(424		)
Operating income (loss)	388			377			1,187			967
Other expense, net	68			(68		)	(61		)	(261		)
Income (loss) before income taxes	$	456		$	309		$	1,126		$	706


Operating Income as a Percentage of Segment Net Sales
MedSurg*	36.8		%	36.7		%	36.6		%	35.4		%
Rhythm and Neuro*	22.7		%	18.3		%	21.4		%	18.1		%
Cardiovascular	29.5		%	27.9		%	30.6		%	28.3		%