News Column

BOSTON SCIENTIFIC CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

August 6, 2014

Introduction

Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a broad range of interventional medical specialties. Our mission is to transform lives through innovative medical solutions that improve the health of patients around the world. Our products and technologies are used to diagnose or treat a wide range of medical conditions, including heart, digestive, pulmonary, vascular, urological, women's health, and chronic pain conditions. We continue to innovate in these areas and are intent on extending our innovations into new geographies and high-growth adjacency markets. Financial Summary Three Months Ended June 30, 2014 Our net sales for the second quarter of 2014 were $1.873 billion, as compared to net sales of $1.809 billion for the second quarter of 2013, an increase of $64 million, or four percent. Excluding the impact of changes in foreign currency exchange rates, which had a $5 million positive impact on our second quarter 2014 net sales as compared to the same period in the prior year, and the decrease in net sales from divested businesses of $18 million, our net sales increased $77 million, or four percent.1 Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business. Our reported net income for the second quarter of 2014 was $4 million, or $0.00 per share. Our reported results for the second quarter of 2014 included intangible asset impairment charges, acquisition- and divestiture-related net credits, litigation-related net charges, restructuring and restructuring-related charges, discrete tax items, and amortization expense totaling $281 million (after-tax), or $0.21 per share. Excluding these items, net income for the second quarter of 2014 was $285 million, or $0.21 per share.1 Our reported net income for the second quarter of 2013 was $130 million, or $0.10 per share. Our reported results for the second quarter of 2013 included intangible asset impairment charges, acquisition- and divestiture-related net credits, restructuring and restructuring-related charges, and amortization expense totaling $117 million (after-tax), or $0.08 per share. Excluding these items, net income for the second quarter of 2013 was $247 million, or $0.18 per share.1 1 Sales growth rates that exclude the impact of sales from divested businesses and/or changes in foreign currency exchange rates and net income and net income per share excluding certain items required by GAAP are not prepared in accordance with U.S. GAAP. Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.



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The following is a reconciliation of results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview for a discussion of each reconciling item:

Three Months Ended June 30, 2014 Tax Impact per in millions, except per share data Pre-Tax Impact After-Tax share GAAP net income (loss) $ (104 )$ 108$ 4$ 0.00 Non-GAAP adjustments: Intangible asset impairment charges 110 (19 ) 91 0.07 Acquisition- and divestiture-related net credits (91 ) (1 ) (92 ) (0.07 ) Restructuring and restructuring-related net charges 25 (6 ) 19 0.01 Discrete tax items - (2 ) (2 ) 0.00 Litigation-related net charges 267 (100 ) 167 0.13 Amortization expense 109 (11 ) 98 0.07 Adjusted net income $ 316$ (31 )$ 285$ 0.21 Three Months Ended June 30, 2013 Tax Impact per in millions, except per share data Pre-Tax Impact After-Tax share GAAP net income (loss) $ 152$ (22 )$ 130$ 0.10 Non-GAAP adjustments: Intangible asset impairment charges 53 (8 ) 45 0.03 Acquisition- and divestiture-related net credits (44 ) 7 (37 ) (0.03 ) Restructuring and restructuring-related net charges 31 (8 ) 23 0.02 Amortization expense 101 (15 ) 86 0.06 Adjusted net income $ 293$ (46 )$ 247$ 0.18 Cash provided by operating activities was $286 million in the second quarter of 2014, as compared to $396 million in the second quarter of 2013. As of June 30, 2014, we had total debt of $4.255 billion, cash and cash equivalents of $357 million and working capital of $1.441 billion. Refer to Liquidity and Capital Resources for further discussion. Six Months Ended June 30, 2014 Our net sales for the first half of 2014 were $3.647 billion, as compared to net sales of $3.570 billion for the first half of 2013, an increase of $77 million, or two percent. Excluding the impact of changes in foreign currency exchange rates, which had a $20 million negative impact on our net sales for the six months ended June 30, 2014 as compared to the same period in the prior year, and the decrease in net sales from divested businesses of $52 million, our net sales increased $149 million, or four percent.1 Refer to Quarterly Results and Business Overview for a discussion of our net sales by global business. Our reported net income for the first half of 2014 was $137 million, or $0.10 per share. Our reported results for the first half of 2014 included intangible asset impairment charges, acquisition- and divestiture-related net credits, litigation-related net charges, restructuring and restructuring-related charges, discrete tax items, and amortization expense totaling $416 million (after-tax), or $0.31 per share. Excluding these items, net income for the first half of 2014 was $553 million, or $0.41 per share.1 Our reported net loss for the first half of 2013 was $224 million or $0.17 per share, driven primarily by a goodwill impairment charge related to our global Cardiac Rhythm Management (CRM) business unit. Our reported results for the first half of 2013 included goodwill and intangible asset impairment charges, acquisition- and divestiture-related net credits, restructuring and restructuring-related and litigation-related net charges, and amortization expense totaling $695 million (after-tax), or $0.52 per share. Excluding these items, net income for the first half of 2013 was $471 million, or $0.35 per share.1 1 Sales growth rates that exclude the impact of sales from divested businesses and/or changes in foreign currency exchange rates and net income and net income per share excluding certain items required by GAAP are not prepared in accordance with U.S. GAAP. Refer to Additional Information for a discussion of management's use of these non-GAAP financial measures.



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The following is a reconciliation of results of operations prepared in accordance with U.S. GAAP to those adjusted results considered by management. Refer to Quarterly Results and Business Overview for a discussion of each reconciling item:

Six Months Ended June 30, 2014 Tax Impact per in millions, except per share data Pre-Tax Impact After-Tax share GAAP net income (loss) $ 42$ 95$ 137$ 0.10 Non-GAAP adjustments: Intangible asset impairment charges 165 (25 ) 140 0.10 Acquisition- and divestiture-related net credits (118 ) (2 ) (120 ) (0.09 ) Restructuring and restructuring-related net charges 53 (13 ) 40 0.03 Discrete tax items - - - 0.00 Litigation-related net charges 260 (99 ) 161 0.12 Amortization expense 218 (23 ) 195 0.15 Adjusted net income $ 620$ (67 )$ 553$ 0.41 Six Months Ended June 30, 2013 Tax Impact per in millions, except per share data Pre-Tax Impact After-Tax share GAAP net income (loss) $ (242 )$ 18$ (224 )$ (0.17 ) Non-GAAP adjustments: Goodwill impairment charge 423 (2 ) 421 0.31 * Intangible asset impairment charges 53 (8 ) 45 0.03 * Acquisition- and divestiture-related net credits (72 ) 10 (62 ) (0.05 ) * Restructuring and restructuring-related net charges 46 (12 ) 34 0.03 * Litigation-related charges 130 (48 ) 82 0.06 * Amortization expense 204 (29 ) 175 0.14 * Adjusted net income $ 542$ (71 ) $ 471 $ 0.35



*Assumes dilution of 14.0 million shares for the six months ended June 30, 2013 for all or a portion of these non-GAAP adjustments.

Cash provided by operating activities was $483 million in the first half of 2014, as compared to $584 million in the first half of 2013. During the first half of 2014, we used $125 million of cash generated from operations to repurchase approximately 10 million shares of our common stock.

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Quarterly Results and Business Overview Net Sales The following table provides our worldwide net sales by business and the relative change on an as reported and constant currency basis, both excluding and including divested businesses. The constant currency growth rates in the tables below can be recalculated from our net sales presented in Note L - Segment Reporting to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q. Net sales that exclude the impact of changes in foreign currency exchange rates are not financial measures prepared in accordance with U.S. GAAP and should not be considered in isolation from, or as a replacement for, the most directly comparable GAAP financial measure. Refer to Additional Information for a further discussion of management's use of this non-GAAP financial measure. Change Three Months Ended June 30, As Reported Constant Currency Currency (in millions) 2014 2013 Basis Basis (restated) Interventional Cardiology $ 528$ 520 2 % 1 % Peripheral Interventions 211 204 3 % 3 % Cardiovascular 739 724 2 % 2 % Cardiac Rhythm Management 497 475 5 % 4 % Electrophysiology 56 36 55 % 54 % Rhythm Management 553 511 8 % 7 % Endoscopy 333 320 4 % 4 % Urology and Women's Health 133 124 7 % 7 % Neuromodulation 114 111 3 % 3 % MedSurg 580 555 5 % 5 % Subtotal Core Businesses 1,872 1,790 5 % 4 % Divested Businesses 1 19 (93 ) % (93 ) % Worldwide $ 1,873$ 1,809 4 % 4 %



We restated segment information for the prior period to reflect the realignment of certain product lines from Endoscopy to Peripheral Interventions as of January 1, 2014.

Growth rates are based on actual, non-rounded amounts and may not recalculate precisely. 40



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Table of Contents Change Six Months Ended June 30, As Reported Constant Currency Currency (in millions) 2014 2013 Basis Basis (restated) Interventional Cardiology $ 1,025$ 1,025 0 % % 1 % Peripheral Interventions 414 400 3 % 4 % Cardiovascular 1,439 1,425 1 % 2 % Cardiac Rhythm Management 963 953 1 % 1 % Electrophysiology 114 71 61 % 60 % Rhythm Management 1,077 1,024 5 % 5 % Endoscopy 647 624 4 % 5 % Urology and Women's Health 258 242 7 % 8 % Neuromodulation 223 200 12 % 12 % MedSurg 1,128 1,066 6 % 7 % Subtotal Core Businesses 3,644 3,515 4 % 4 % Divested Businesses 3 55 (94 ) % (94 ) % Worldwide $ 3,647$ 3,570 2 % 2 %



We restated segment information for the prior period to reflect the realignment of certain product lines from Endoscopy to Peripheral Interventions as of January 1, 2014.

Growth rates are based on actual, non-rounded amounts and may not recalculate precisely. Cardiovascular Interventional Cardiology Our Interventional Cardiology division develops, manufactures and markets technologies for diagnosing and treating coronary artery disease and other cardiovascular disorders. Product offerings include coronary stents, including drug-eluting and bare metal stent systems, balloon catheters, rotational atherectomy systems, guide wires, guide catheters, embolic protection devices, crossing and re-entry devices for the treatment of chronically occluded coronary vessels, diagnostic catheters used in percutaneous transluminal coronary angioplasty procedures, and intravascular ultrasound (IVUS) imaging systems. We also offer structural heart products in certain international markets, which include a device for transcatheter aortic valve replacement and a device designed to close the left atrial appendage.



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Our worldwide net sales of Interventional Cardiology products were $528 million in the second quarter of 2014, or approximately 28 percent of our consolidated net sales in the second quarter of 2014. Our worldwide net sales of Interventional Cardiology products increased $8 million, or two percent, in the second quarter of 2014, as compared to the same period in 2013. Excluding the impact of changes in foreign currency exchange rates, which had a $1 million positive impact on our Interventional Cardiology net sales in the second quarter of 2014, as compared to the same period in the prior year, net sales of these products increased $7 million, or one percent. This increase was primarily related to sales of our Promus PREMIER™ Stent System in the U.S., our structural heart products in international markets, including the Lotus™ transcatheter aortic valve replacement system and the WATCHMAN® left atrial appendage closure device, along with operational growth in our other cardiology product lines. The Lotus™ Valve System consists of a stent-mounted tissue valve prosthesis and catheter delivery system for guidance and placement of the valve. In April 2013, we completed enrollment in the REPRISE II clinical trial to evaluate the safety and performance of the Lotus™ Valve System. In October 2013, we received CE Mark approval and launched the Lotus ™ Valve System in Europe. The WATCHMAN® left atrial appendage closure technology is the first device studied in a randomized clinical trial to offer an alternative to anticoagulant drugs, and is marketed in CE Mark and other international countries. In the U.S., we completed the 18 month follow-up PREVAIL trial and final 5 year follow-up in the PROTECT AF trial to evaluate the safety and efficacy of the WATCHMAN® device in patients with nonvalvular atrial fibrillation versus long-term warfarin therapy and are working towards FDA approval of the device. During the second quarter of 2014, we were informed by the FDA that another Circulatory System Devices Panel would be convened in October 2014 to review the WATCHMAN® clinical evidence. As a result, our goal for U.S. FDA approval and launch of this technology is now the first half of 2015. Due to the revised expectations and timing for the U.S. launch, we recorded impairment charges related to the WATCHMAN® device in-process research and development intangible assets during the second quarter of 2014. Refer to Intangible Asset Impairment Charges for further details. Our coronary stent system sales represent a significant portion of our Interventional Cardiology net sales. The following are the components of our worldwide coronary stent system sales: Three Months Ended Three Months Ended (in millions) June 30, 2014 June 30, 2013 U.S. International Total U.S. International Total Drug-eluting $ 127 $ 171 $ 298$ 117 $ 170 $ 287 Bare-metal 4 8 12 5 12 17 $ 131 $ 179 $ 310$ 122 $ 182 $ 304 Our worldwide net sales of coronary stent systems increased $6 million, or two percent, in the second quarter of 2014, as compared to the same period in 2013. Excluding the impact of changes in foreign currency exchange rates, which had a $1 million negative impact on our coronary stent system net sales in the second quarter of 2014, compared to the same period in the prior year, net sales of these products increased $7 million, or two percent. This increase was primarily related to market share gains due to the ongoing worldwide roll-out of our Promus PREMIER™ Everolimus-Eluting Platinum Chromium Coronary Stent System and increases in market-wide procedural volumes partially offset by average selling price declines in the drug-eluting stent (DES) market. In May 2014 we launched our Promus PREMIER™ Everolimus-Eluting Platinum Chromium Coronary Stent System in Japan, following regulatory approval by the Japanese Ministry of Health, Labor and Welfare (MHLW). We had previously launched this technology in Europe and select other geographies during the first quarter of 2013, and in the U.S. during the fourth quarter of 2013. The Promus PREMIER™ Stent System is designed to provide physicians improved drug-eluting stent performance in treating patients with coronary artery disease, featuring unique customized platinum chromium alloy stent architecture and an enhanced stent delivery system. We also market our next generation SYNERGY™ Everolimus-Eluting Platinum Chromium Coronary Stent System in select European and other CE Mark countries, which features an ultra-thin abluminal (outer) bioabsorbable polymer coating. During the first half of 2014, we continued to expand our commercial launch of this technology in Europe. We have completed patient enrollment in the EVOLVE II clinical trial, which is designed to further assess the safety and effectiveness of the SYNERGY Stent System and support U.S. Food and Drug Administration and Japanese regulatory approvals for this technology. Peripheral Interventions (PI) Our PI product offerings include stents, balloon catheters, wires, peripheral embolization devices and other devices used to diagnose and treat peripheral vascular disease. Our worldwide net sales of these products were $211 million in the second quarter of 2014, as compared to $204 million in the second quarter of 2013, an increase of $7 million, or three percent. Excluding the impact of changes in foreign currency exchange rates, which had a $1 million positive impact on our PI net sales in the second quarter of 2014, as compared to the same period in the prior year, net sales of these products increased $6 million, or three percent. The 42



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year-over-year increase in worldwide PI net sales was primarily driven by growth in our core PI franchise as the result of new product launches in stents, balloons and chronic total occlusions (CTO) devices, which we expect to continue to drive our future growth in PI. During the fourth quarter of 2012, we completed the acquisition of Vessix, a developer of catheter-based renal denervation systems for the treatment of resistant hypertension. Through the acquisition of Vessix, we added a second generation, highly differentiated technology to our hypertension strategy and launched this technology in Europe in May 2013. We have seen a slowdown in the resistant hypertension market in Europe following the failure of a competitor's large randomized clinical trial, which was announced during the first quarter of 2014. During the second quarter of 2014, based on a careful examination of the available data, we determined we would not pursue a global pivotal trial as previously designed. As a result of changes in our clinical strategy and lower estimates of the European and global hypertension markets, we reduced our expectations for future revenue and recorded impairment charges related to the Vessix technology intangible assets during the first and second quarter of 2014. Refer to Intangible Asset Impairment Charges for further details. Rhythm Management Cardiac Rhythm Management (CRM) Our CRM division develops, manufactures and markets a variety of implantable devices including implantable cardioverter defibrillator (ICD) systems and pacemaker systems that monitor the heart and deliver electricity to treat cardiac abnormalities. Worldwide net sales of our CRM products of $497 million in the second quarter of 2014 represented approximately 27 percent of our consolidated net sales for the second quarter of 2014. Our worldwide CRM net sales increased $22 million, or five percent, in the second quarter of 2014, as compared to the same period in the prior year. Excluding the impact of changes in foreign currency exchange rates, which had a $3 million positive impact on our second quarter 2014 CRM net sales, as compared to the same period in the prior year, our CRM net sales increased $19 million, or four percent. The following are the components of our worldwide CRM net sales: Three Months Ended Three Months Ended (in millions) June 30, 2014 June 30, 2013 U.S. International Total U.S. International Total ICD systems $ 223 $ 132 $ 355$ 213 $ 129 $ 342 Pacemaker systems 67 75 142 69 64 133 CRM products $ 290 $ 207 $ 497$ 282 $ 193 $ 475 The increase in our worldwide CRM net sales during the second quarter of 2014 as compared to the second quarter of 2013 was principally the result of increases in our denovo ICD market share as a result of our subcutaneous implantable cardioverter defibrillator (S-ICD) technology and our new line of defibrillators; partially offset by lower volumes of replacement procedures and implantable cardiac resynchronization therapy defibrillator (CRT-D) market share losses in certain regions. In February 2014, our European business initiated the full launch of our new X4 line of quadripolar CRT-D systems, including the AUTOGEN™ X4, DYNAGEN™ X4, and INOGEN™ X4 cardiac resynchronization therapy defibrillators (CRT-Ds), a suite of ACUITY™ X4 quadripolar LV leads and the ACUITY™ PRO lead delivery system. In addition, in April 2014, we received FDA approval for the DYNAGEN™ MINI and INOGEN™ MINI ICDs, the smallest fully-powered standard longevity ICDs on the market, as well as the DYNAGEN™ X4 and INOGEN™ X4 CRT-Ds. These new defibrillators were launched in the U.S. during the second quarter. During the second quarter of 2012, we completed the acquisition of Cameron Health, Inc. (Cameron). Cameron developed the world's first and only commercially available subcutaneous implantable cardioverter defibrillator, the S-ICD® System, which we believe is a differentiated technology that will provide us the opportunity to both increase our market share in the existing ICD market and expand that market over time. The S-ICD® System has received CE Mark and FDA approval. We became supply constrained in early March 2013 and were only able to provide a very limited supply of S-ICD® systems during the second and third quarters of 2013, and during the fourth quarter of 2013, we resumed our launch of our S-ICD® System. Our worldwide pacemaker system sales increased during the second quarter of 2014 as compared to the second quarter of 2013 primarily due to the launch of our magnetic resonance imaging (MRI) compatible pacemaker system in Japan during the first quarter of 2014; and revenue growth in Europe related to our Ingevity family of MRI compatible pacing leads. Ingevity™ MRI pacing leads are part of the ImageReady™ MR-conditional pacemaker system, which includes VITALIO™ MRI, FORMIO™ MRI, ADVANTIO™ MRI and INGENIO™ MRI pulse generators. When used with the LATTITUDE™ NXT Patient Management



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System, these devices wirelessly monitor patients for conditions such as atrial arrhythmias. We commenced the U.S. Investigational Device Exemption (IDE) trial for the Ingevity™ MRI pacing lead during February 2013. Electrophysiology Our Electrophysiology business develops less-invasive medical technologies used in the diagnosis and treatment of rate and rhythm disorders of the heart. Our leading products include the Blazer™ line of ablation catheters, designed to deliver enhanced performance, responsiveness and durability. Our Blazer™ line includes our next generation Blazer™ Prime ablation catheter, and our Blazer™ open-irrigated catheter, launched in select European countries in the second quarter of 2010. Worldwide net sales of our Electrophysiology products were $56 million in the second quarter of 2014 as compared to $36 million in the second quarter of 2013, an increase of $20 million. Excluding the impact of changes in foreign currency exchange rates, which had a $1 million positive impact on our Electrophysiology net sales in the second quarter of 2014, as compared to the same period in the prior year, net sales of these products increased $19 million, or 54 percent. The increase was a result of our acquisition of the electrophysiology business of C.R. Bard Inc. (Bard EP), which we completed on November 1, 2013. We believe that the acquisition of Bard EP brings a strong commercial team and complementary portfolio of ablation catheters, diagnostic tools, and electrophysiology recording systems, and will allow us to better serve the global Electrophysiology market through a more comprehensive portfolio offering and sales infrastructure. During the second quarter of 2014, we recorded $24 million of revenue from Bard EP sales. During the fourth quarter of 2012, we completed the acquisition of Rhythmia Medical, Inc. (Rhythmia), a developer of next-generation mapping and navigation solutions for use in cardiac catheter ablations and other electrophysiology procedures, including atrial fibrillation and atrial flutter. We received CE Mark approval for the Rhythmia technology during the second quarter of 2013 and received FDA approval during July 2013. We expect to initiate a limited launch of the Rhythmia next-generation mapping and navigation system in the second half of 2014. We believe that the Rhythmia and Bard EP acquisitions, as well as our other expected product launches, will help to position us to participate more competitively in the growing Electrophysiology market. MedSurg Endoscopy Our Endoscopy business develops and manufactures devices to treat a variety of medical conditions including diseases of the digestive and pulmonary systems. Our worldwide net sales of these products were $333 million for the second quarter of 2014, as compared to $320 million in the second quarter of 2013, an increase of $13 million, or four percent. Changes in foreign currency exchange rates did not materially affect our worldwide Endoscopy net sales in the second quarter of 2014, as compared to the second quarter of 2013. The increase in net sales was the result of growth across several of our key product franchises, including our biliary device franchise driven by the continued growth of our ExpectTM Endoscopic Ultrasound Aspiration Needle; our hemostasis franchise on the continued adoption and utilization of our Resolution Clip for gastrointestinal bleeding; and our Polypectomy franchise in which growth was driven by the sales of our Twister® Plus rotatable retrieval device. Urology and Women's Health Our Urology and Women's Health business develops and manufactures devices to treat various urological and gynecological disorders. Our worldwide net sales of these products were $133 million in the second quarter of 2014, as compared to $124 million in the second quarter of 2013, an increase of approximately $9 million, or seven percent. Changes in foreign currency exchange rates did not materially affect our worldwide Urology and Women's Health net sales in the second quarter of 2014, as compared to the second quarter of 2013. The increase in worldwide Urology and Women's Health net sales was primarily due to recent product launches and growth in the international business as a result of our global commercial expansion. We believe that our Urology and Women's Health business will continue to grow as a result of recent product launches in the U.S. and our continued expansion of the global footprint of this business. On May 7, 2014, we completed the acquisition of the remaining fully diluted equity of IoGyn. IoGyn has developed the SymphionTM System, a next generation system for hysteroscopic intrauterine tissue removal including fibroids (myomas) and polyps. In March 2014, IoGyn received U.S. FDA approval for the system, and we expect to launch the system in the United States in the second half of 2014. We will integrate the operations of the IoGyn business with our gynecological surgery business, which is part of our Urology and Women's Health division.



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Neuromodulation

Our Neuromodulation business offers the Precision® and Precision Spectra™ Spinal Cord Stimulation (SCS) systems, used for the management of chronic pain. Our worldwide net sales of Neuromodulation products were $114 million in the second quarter of 2014, as compared to $111 million in the second quarter of 2013, an increase of $3 million, or three percent. Changes in foreign currency exchange rates did not materially affect our Neuromodulation net sales in the second quarter of 2014, as compared to the same period in the prior year. The revenue growth in our Neuromodulation business was primarily a result of sales of our Precision Spectra System. The Precision Spectra System is the world's first and only SCS system with 32 contacts and 32 dedicated power sources and is designed to provide improved pain relief to a wide range of patients who suffer from chronic pain. Significant changes to Medicare reimbursement for physician office trialing of spinal cord stimulation (SCS) systems went into effect January 1, 2014, resulting in slower trialing volumes, which are typically a leading indicator of total SCS market growth. Due to the higher prior year growth connected with the 2013 launch of Precision Spectra™ and current year changes in reimbursement, our growth rate in Neuromodulation slowed during the second quarter of 2014. As physicians adjust their practice patterns, we believe the market may slow this year to reflect the new reimbursement environment. During the third quarter of 2012, we received CE Mark approval for use of our Vercise™ Deep Brain Stimulation (DBS) System for the treatment of Parkinson's disease in Europe, and we began our U.S. pivotal trial for the treatment of Parkinson's disease during the second quarter of 2013. During the fourth quarter of 2013, we received CE Mark approval for use of our Vercise™ DBS System for the treatment of intractable primary and secondary dystonia. We believe we have an exciting opportunity in DBS with the Vercise™ DBS System, which is designed to selectively stimulate targeted areas of the brain to customize therapy for patients and minimize side effects of unwanted stimulation. Emerging Markets As part of our strategic imperatives to drive global expansion, described in our 2013 Annual Report on Form 10-K, we are seeking to grow net sales and market share by expanding our global presence, including in Emerging Markets. We define Emerging Markets as including certain developing countries that we believe have strong growth potential based on their economic conditions, healthcare sectors, and our global capabilities, which currently include 20 countries. We are seeking to expand our presence and strengthen relationships in order to grow net sales and market share within our Emerging Markets, and we have increased our investment in infrastructure in these countries in order to maximize opportunities. Our Emerging Markets revenue grew 10 percent on a reported basis and was approximately 10 percent of our consolidated net sales in the second quarter of 2014. Gross Profit Our gross profit was $1.310 billion for the second quarter of 2014, $1.279 billion for the second quarter of 2013, $2.547 billion for the first half of 2014, and $2.462 billion for the first half of 2013. As a percentage of net sales, our gross profit decreased to 69.9 percent in the second quarter of 2014, as compared to 70.7 percent in the second quarter of 2013 and increased to 69.8 percent for the first half of 2014, as compared to 69.0 percent for the first half of 2013. The following is a reconciliation of our gross profit margins and a description of the drivers of the change from period to period: Three Months Six Months Gross profit margin - period ended June 30, 2013 70.7 % 69.0 % Manufacturing cost reductions 2.2 1.7 Neurovascular divestiture 0.5 0.8 PROMUS® supply true-up (0.9 ) (0.4 ) Sales pricing and mix (2.0 )



(1.3 ) All other, including other inventory charges, other period expense and net impact of foreign currency

(0.6 )



-

Gross profit margin - period ended June 30, 2014 69.9 %



69.8 %

The primary factors contributing to the decrease in our gross profit margin during the second quarter of 2014, as compared to the same period in 2013, were the negative impacts of pricing related primarily to sales of our drug-eluting stent and CRM products, as well as changes in the mix of our product sales. In addition, during the second quarter of 2013 we recorded a credit to cost of products sold related to the final retroactive pricing adjustment pursuant to our PROMUS® supply arrangement with Abbott for historical purchases of PROMUS® stent systems. Partially offsetting these factors was positive impact of cost reductions as a result of our restructuring and other process improvement programs. Our gross profit margin was also positively impacted by lower sales related to our divested businesses, as these sales are at significantly lower gross profit margins. 45



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The increase in our gross profit margin for the first half of 2014, as compared to the first half of 2013, primarily resulted from the positive impacts of lower sales related to our divested businesses, as these sales are at significantly lower gross profit margins, as well as manufacturing cost reductions as a result of our restructuring and other process improvement programs. Partially offsetting these factors was the negative impact of pricing related primarily to sales of our drug-eluting stent and CRM products, as well as changes in the mix of our product sales. In addition, during the second quarter of 2013, we recorded a credit to cost of products sold related to the final retroactive pricing adjustment pursuant to our PROMUS® supply arrangement with Abbott for historical purchases of PROMUS® stent systems. Operating Expenses The following table provides a summary of certain of our operating expenses: Three Months Ended June 30,



Six Months Ended June 30,

2014 2013 2014 2013 % of Net % of Net % of Net % of Net (in millions) $ Sales $ Sales $ Sales $ Sales Selling, general and administrative expenses 743 39.7 % 661 36.5 % 1,409 38.6 % 1,292 36.2 % Research and development expenses 206 11.0 % 223 12.3 % 397 10.9 % 427 12.0 % Royalty expense 25 1.3 % 47 2.6 % 65 1.8 % 87 2.4 % Selling, General and Administrative (SG&A) Expenses In the second quarter of 2014, our SG&A expenses increased $82 million, or 12 percent, as compared to the second quarter of 2013, and were 320 basis points higher as a percentage of net sales. This increase was driven primarily by SG&A increases related to business combinations that we have completed over the last several years, product launches and other commercial programs, and our expansion efforts in emerging markets, partially offset by declines in spending as a result of our restructuring and other cost reduction initiatives. In the first half of 2014, our SG&A expenses increased $117 million, or nine percent, as compared to the first half of 2013, and were 240 basis points higher as a percentage of net sales. This increase was driven primarily by SG&A increases related to business combinations that we have completed over the last several years, product launches and other commercial programs, and our expansion efforts in emerging markets, partially offset by declines in spending as a result of our restructuring and other cost reduction initiatives. Research and Development (R&D) Expenses In the second quarter of 2014, our R&D expenses decreased $17 million, or eight percent, as compared to the second quarter of 2013, and were 130 basis points lower as a percentage of net sales. The decrease was due primarily to the benefits from our initiatives to transform our research and development efforts to be more effective and cost efficient, as well as the timing of certain R&D programs. In the first half of 2014, our R&D expenses decreased $30 million, or seven percent, as compared to the first half of 2013, and were 110 basis points lower as a percentage of net sales. The decrease was due primarily to the benefits from our initiatives to transform our research and development efforts to be more effective and cost efficient, as well as the timing of certain R&D programs. We remain committed to advancing medical technologies and investing in meaningful research and development projects across our businesses in order to maintain a healthy pipeline of new products that we believe will contribute to profitable sales growth. Royalty Expense In the second quarter of 2014, our royalty expense decreased $22 million, or 47 percent, as compared to the second quarter of 2013, and was 130 basis points lower as a percentage of net sales. This decrease relates primarily to a renegotiation of a royalty agreement in the second quarter of 2014 that resulted in a lower royalty rate structure and was retroactive to the beginning of 2014.



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In the first half of 2014, our royalty expense decreased $22 million, or 25 percent, as compared to the first half of 2013, and was 60 basis points lower as a percentage of net sales. This decrease relates primarily to a renegotiation of a royalty agreement in the second quarter of 2014 that resulted in a lower royalty rate structure and was retroactive to the beginning of 2014. Amortization Expense Our amortization expense was $109 million in the second quarter of 2014, as compared to $101 million in the second quarter of 2013, and $218 million in the first half of 2014, as compared to $204 million in the first half of 2013. This increase was due primarily to amortizable intangible assets acquired during the second half of 2013. Amortization expense is excluded by management for purposes of evaluating operating performance. Goodwill Impairment Charge 2013 Charge Following our reorganization from regions to global business units and our reallocation of goodwill on a relative fair value basis as of January 1, 2013, we conducted the first step of the goodwill impairment test for all global reporting units. As of January 1, 2013, the fair value of each global reporting unit exceeded its carrying value, with the exception of the global Cardiac Rhythm Management (CRM) reporting unit. In accordance with ASC Topic 350, Intangibles-Goodwill and Other (Topic 350) and our accounting policies, we tested the global CRM intangible assets and goodwill for impairment and recorded a non-cash goodwill impairment charge of $423 million ($422 million after-tax) to write down the goodwill to its implied fair value as of January 1, 2013 as a result of this analysis. The primary driver of this impairment charge was our reorganization from geographic regions to global business units as of January 1, 2013, which changed the composition of our reporting units. As a result of the reorganization, any goodwill allocated to the global CRM reporting unit was no longer supported by the cash flows of other businesses. Under our former reporting unit structure, the goodwill allocated to our regional reporting units was supported by the cash flows from all businesses in each international region. The hypothetical tax structure of the global CRM business and the global CRM business discount rate applied were also contributing factors to the goodwill impairment charge. Refer to Note D - Goodwill and Other Intangible Assets contained in Item 8 of our 2013 Annual Report on Form 10-K for details on the 2013 goodwill impairment charge. Goodwill impairment charges do not impact our debt covenants or our cash flows, and are excluded by management for purposes of evaluating operating performance. Intangible Asset Impairment Charges



2014 Charges

During the second quarter of 2014, as a result of revised estimates developed in conjunction with our annual strategic planning process and annual goodwill impairment test, we performed an interim impairment test of our in-process research and development projects and core technology associated with certain of our acquisitions. Based on our impairment assessment, and lower expected future cash flows associated with our intangible assets, we recorded pre-tax impairment charges of $110 million in the second quarter of 2014. As a result of changes in our clinical strategy and lower estimates of the European and global hypertension markets, and the resulting amount of future revenue and cash flows associated with the technology acquired from Vessix, we recorded impairment charges of $67 million related to technology intangible assets during the second quarter of 2014. In addition, due to revised expectations and timing as a result of the upcoming third FDA Circulatory System Devices Panel, we recorded impairment charges of $35 million related to the Atritech in-process research and development intangible assets during the second quarter of 2014. We also recorded an additional $8 million intangible asset impairment charge associated with changes in the amount of the expected cash flows related to certain other acquired in-process research and development projects. During the first quarter of 2014, as a result of lower estimates of the resistant hypertension market following the announcement of data from a competitor's clinical trial, we performed an interim impairment test of our in-process research and development projects and core technology associated with our acquisition of Vessix. The impairment assessments were based upon probability-weighted cash flows of potential future scenarios. Based on our impairment assessment, and lower expected future cash flows associated with our Vessix-related intangible assets, we recorded pre-tax impairment charges of $55 million in the first quarter of 2014 to write-down the balance of these intangible assets to their fair value.



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2013 Charges

During the second quarter of 2013, as a result of revised estimates developed in conjunction with our annual strategic planning process and annual goodwill impairment test, we performed an interim impairment test of our in-process research and development projects associated with certain of our acquisitions. Based on the results of our impairment analysis, we revised our expectations of the market size related to Sadra Medical, Inc. (Sadra), and the resulting timing and amount of future revenue and cash flows associated with the technology acquired from Sadra. As a result of these changes, we recorded pre-tax impairment charges of $51 million in the second quarter of 2013 to write-down the balance of these intangible assets to their fair value in each respective period. During the second quarter of 2013, we also recorded an additional $2 million intangible asset impairment charge associated with changes in the amount of the expected cash flows related to certain other acquired in-process research and development projects. We recorded these amounts in the intangible assets impairment caption in our accompanying unaudited condensed consolidated statements of operations. Intangible asset impairment charges do not impact our debt covenants or our cash flows, and are excluded by management for purposes of evaluating operating performance. Contingent Consideration Expense 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. 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 consolidated statements of operations. Increases or decreases in the fair value of the contingent consideration liability 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 regulatory, revenue or commercialization-based milestones. We recorded net benefits related to the change in fair value of our contingent consideration liabilities of $96 million and $118 million in the second quarter and first half of 2014, respectively, and net benefits of $18 million and $41 million during the second quarter and first half of 2013, respectively. Contingent consideration expense is excluded by management for purposes of evaluating operating performance. Restructuring Charges and Restructuring-related Activities 2014 Restructuring Plan On October 22, 2013, our Board of Directors approved, and we committed to, a restructuring initiative (the 2014 Restructuring plan). The 2014 Restructuring plan is intended to build on the progress we have made to address financial pressures in a changing global marketplace, further strengthen our operational effectiveness and efficiency and support new growth investments. Key activities under the plan include continued implementation of our ongoing Plant Network Optimization (PNO) strategy, continued focus on driving operational efficiencies and ongoing business and commercial model changes. The PNO strategy is intended to simplify our manufacturing plant structure by transferring certain production lines among facilities. Other activities involve rationalizing organizational reporting structures to streamline various functions, eliminate bureaucracy, increase productivity and better align resources to business strategies and marketplace dynamics. These activities were initiated in the fourth quarter of 2013 and are expected to be substantially completed by the end of 2015. We estimate that the 2014 Restructuring plan will reduce gross annual pre-tax operating expenses by approximately $150 million to $200 million exiting 2015, and we expect a substantial portion of the savings to be reinvested in strategic growth initiatives. We estimate that the implementation of the 2014 Restructuring plan will result in total pre-tax charges of approximately $175 million to $225 million, of which approximately $160 million to $210 million is expected to result in future cash outlays. In the aggregate, we recorded net restructuring charges pursuant to our restructuring plans of $15 million in the second quarter of 2014, $26 million in the second quarter of 2013, $35 million in the first half of 2014, and $36 million in the first half of 2013. In addition, we recorded expenses within other lines of our accompanying unaudited condensed consolidated statements of operations related to our restructuring initiatives of $10 million in the second quarter of 2014, $5 million in the second quarter of 2013, $18 million in the first half of 2014, and $10 million in the first half of 2013. Restructuring and restructuring-related costs are excluded by management for purposes of evaluating operating performance.



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We made cash payments of $53 million during the first half of 2014 associated with our restructuring initiatives. We made cash payments of $71 million, and received $53 million of cash proceeds on facility and fixed asset sales, associated with our restructuring initiatives during the first half of 2013. See Note G - Restructuring Related Activities to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for additional details related to our restructuring plans. Litigation-related charges and credits We recorded litigation-related net charges of $267 million in the second quarter of 2014 and $260 million in the first half of 2014. We recorded no net litigation-related charges in the second quarter of 2013 and $130 million in the first half of 2013. These charges and credits are excluded by management for purposes of evaluating operating performance. Refer to Note J - Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for discussion of our material legal proceedings. Gain on divestiture In January 2011, we closed the sale of our Neurovascular business to Stryker Corporation for a purchase price of $1.500 billion, $1.450 billion of which we received at closing. We recorded a gain of $34 million in the second quarter of 2013, $12 million in the first half of 2014, and $40 million in the first half of 2013 related to this divestiture. Divestiture-related gains or charges are excluded by management for purposes of evaluating operating performance. See Note C - Divestitures to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for additional information. Interest Expense Our interest expense was $53 million in the second quarter of 2014 and $108 million in the first half of 2014, as compared to $65 million in the second quarter of 2013 and $130 million in the first half of 2013. The decrease in our interest expense is primarily related to the refinancing of our public debt in the third quarter of 2013 and our interest rate derivative instruments, which we entered in the fourth quarter of 2013. These instruments have a notional amount of $450 million and convert fixed-rate debt into floating-rate debt. Our average borrowing rate was 4.8 percent in the second quarter of 2014 and first half of 2014, as compared to 5.7 percent in the second quarter and first half of 2013. Refer to Liquidity and Capital Resources and Note E - Fair Value Measurements and Note F - Borrowings and Credit Arrangements to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for information regarding our debt obligations and related derivative instruments and hedging activities. Other, net Our other, net reflected income of $18 million in the second quarter of 2014, expense of $3 million in the second quarter of 2013, income of $22 million in the first half of 2014, and expense of $3 million in the first half of 2013. The following are the components of other, net: Three Months Ended Six Months Ended June 30, June 30, (in millions) 2014 2013 2014 2013 Interest income $ 1$ 3$ 2$ 5 Foreign currency losses (3 ) - (6 ) (2 ) Net gains (losses) on investments 23 (3 ) 29 (3 ) Other income (expense), net (3 ) (3 ) (3 ) (3 ) $ 18$ (3 )$ 22$ (3 ) During the second quarter of 2014, we recognized gains of $19 million associated with the acquisition of IoGyn, Inc. related to previously held investments. Refer to Note B - Acquisitions to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for information regarding the IoGyn acquisition. Tax Rate Our effective tax rates from continuing operations for the three months ended June 30, 2014 and June 30, 2013, were 103.8% and 14.3%, respectively. For the first half of 2014 and 2013 our effective tax rates from continuing operations were (222.5)% and 7.6%, respectively. The change in our reported tax rate for the second quarter and first half of 2014, as compared to the same



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periods in 2013, 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- and divestiture-related items, and litigation- and restructuring-related items. In addition, the reported tax rate in the second quarter of 2013 was also impacted by certain discrete tax items, including uncertain tax positions related to audit findings, while the first half of 2013 was favorably affected by discrete tax items that primarily related to the reinstatement of tax legislation that was retroactively applied, offset in part by the resolution of the uncertain tax positions related to audit settlements and findings. During the first quarter of 2014, we received a Revenue Agent Report from the Internal Revenue Services (IRS) reflecting significant proposed audit adjustments for our 2008, 2009 and 2010 tax years based upon the same transfer pricing methodologies that are currently being contested in U.S. Tax Court for our tax years from 2001 to 2007. As with the prior years, we disagree with the transfer pricing methodologies being applied by the IRS and we expect to contest any adjustments received through applicable IRS and judicial procedures, as appropriate. We believe that our income tax reserves associated with these matters are adequate as of June 30, 2014. However, final resolution is uncertain and could have a material impact on our financial condition, results of operations, or cash flows. During the six months ended June 30, 2014, there were no other material changes to significant unresolved matters with the IRS or foreign tax authorities from what we disclosed in our 2013 Annual Report on Form 10-K. Critical Accounting Policies and Estimates Our financial results are affected by the selection and application of accounting policies and methods. There were no material changes in the six months ended June 30, 2014 to the application of critical accounting policies and estimates as described in our 2013 Annual Report on Form 10-K. Goodwill Valuation We allocate any excess purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination to goodwill. When allocating goodwill from business combinations to our reporting units, we assign goodwill to the reporting units that we expect to benefit from the respective business combination at the time of acquisition. We assess goodwill for impairment at the reporting unit level, which is defined as an operating segment or one level below an operating segment, referred to as a component. 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 that impairment may exist. In performing the assessment, we utilize the two-step approach prescribed under ASC Topic 350, Intangibles-Goodwill and Other. For our 2014 and our 2013 goodwill impairment testing, we used only the income approach, specifically the discounted cash flow (DCF) method, to derive the fair value of each of our reporting units in preparing our goodwill impairment assessments. This approach calculates fair value by estimating the after-tax cash flows attributable to a reporting unit and then discounting these after-tax cash flows to a present value using a risk-adjusted discount rate. We selected this method as being the most meaningful in preparing our goodwill assessments because we believe the income approach most appropriately measures our income producing assets. We have considered using the market approach and cost approach but concluded they are not appropriate in valuing our reporting units given differences in our reporting units' mix of currently marketed products, market shares, future product launch cadence, and expected profitability levels that render the market comparisons less relevant for application of the market approach and the inability to replicate the value of the specific technology-based assets within our reporting units for application of the cost approach. Therefore, we believe that the income approach represents the most appropriate valuation technique for which sufficient data is available to determine the fair value of our reporting units. In applying the income approach to our accounting for goodwill, we make assumptions about the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. The amount and timing of future cash flows within our DCF analysis is based on our most recent operational budgets, long range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period in our DCF analysis and reflects our best estimates for stable, perpetual growth of our reporting units. We use estimates of market-participant risk-adjusted Weighted Average Cost of Capital (WACC) as a basis for determining the discount rates to apply to our reporting units' future expected cash flows. In addition, for purposes of performing our goodwill impairment tests, assets and liabilities, including corporate assets, which relate to a reporting unit's operations, and would be considered in determining its fair value, are allocated to the individual reporting units. We allocate assets and liabilities not directly related to a specific reporting unit, but from which the reporting unit benefits, based primarily on the respective revenue contribution of each reporting unit. If the carrying value of a reporting unit exceeds its fair value, we then perform the second step of the goodwill impairment test to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the estimated fair value of a reporting unit's goodwill to its carrying value. If we were unable to complete the second step of the test prior to the issuance of our financial statements and an impairment loss was probable and could be reasonably estimated, we would recognize our best



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estimate of the loss in our current period financial statements and disclose that the amount is an estimate. We would then recognize any adjustment to that estimate in subsequent reporting periods, once we have finalized the second step of the impairment test. Although we use consistent methodologies in developing the assumptions and estimates underlying the fair value calculations used in our impairment tests, these estimates are uncertain by nature and can vary from actual results. The use of alternative valuation assumptions, including estimated revenue projections, growth rates, cash flows and discount rates could result in different fair value estimates. In the second quarter of 2014, we performed our annual goodwill impairment test for all of our reporting units. In conjunction with our annual test, the fair value of each reporting unit exceeded its carrying value. As a result of the 2014 annual goodwill impairment test, we have identified our global Neuromodulation and global Electrophysiology reporting units as being at higher risk of potential failure of the first step of the goodwill impairment test in future reporting periods. Our global Neuromodulation reporting unit had excess fair value over carrying value of approximately 55 percent and held $1.356 billion of allocated goodwill as of June 30, 2014. Our global Electrophysiology reporting unit had excess fair value over carrying value of approximately 38 percent and held $292 million of allocated goodwill as of June 30, 2014. Our global CRM reporting unit had a fair value approximately equal to its carrying value; however, due to goodwill impairment charges in prior years, no goodwill remains within our CRM reporting unit. Changes in our reporting units or in the structure of our business as a result of future reorganizations, acquisitions or divestitures of assets or businesses could result in future impairments of goodwill within our reporting units including global CRM. Further, the recoverability of our CRM-related amortizable intangibles ($4.236 billion globally as of June 30, 2014) is sensitive to future cash flow assumptions and our global CRM business performance. The $4.236 billion of CRM-related amortizable intangibles are at higher risk of potential failure of the first step of the amortizable intangible recoverability test in future reporting periods. An impairment of a material portion of our CRM-related amortizable intangibles carrying value would occur if the second step of the amortizable intangible test is required in a future reporting period. On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. The key variables that drive the cash flows of our reporting units and amortizable intangibles are estimated revenue growth rates and levels of profitability. Terminal value growth rate assumptions, as well as the WACC rate applied are additional key variables for reporting unit cash flows. These assumptions are subject to uncertainty, including our ability to grow revenue and improve profitability levels. Relatively small declines in the future performance and cash flows of a reporting unit or asset group or small changes in other key assumptions may result in the recognition of significant asset impairment charges. For example, keeping all other variables constant, an increase in the WACC applied of 100 basis points combined with a 150 basis point decrease in the terminal value growth rate would require that we perform the second step of the goodwill impairment test for both our global Electrophysiology and global Nueromodulation reporting units. The estimates used for our future cash flows and discount rates represent management's best estimates, which we believe to be reasonable, but future declines in business performance may impair the recoverability of our goodwill and intangible asset balances. Future events that could have a negative impact on the levels of excess fair value over carrying value of our reporting units and/or amortizable intangible assets include, but are not limited to:



• decreases in estimated market sizes or market growth rates due to

greater-than-expected declines in procedural volumes, pricing pressures,

reductions in reimbursement levels, product actions, and/or competitive

technology developments;

• declines in our market share and penetration assumptions due to increased

competition, an inability to develop or launch new and next-generation

products and technology features in line with our commercialization strategies, and market and/or regulatory conditions that may cause significant launch delays or product recalls; • decreases in our forecasted profitability due to an inability to



successfully implement and achieve timely and sustainable cost improvement

measures consistent with our expectations, increases in our market-participant tax rate, and/or changes in tax laws;



• negative developments in intellectual property litigation that may impact

our ability to market certain products or increase our costs to sell certain products;



• the level of success of on-going and future research and development

efforts, including those related to recent acquisitions, and increases in

the research and development costs necessary to obtain regulatory approvals and launch new products; • the level of success in managing the growth of acquired companies, achieving sustained profitability consistent with our expectations,



establishing government and third-party payer reimbursement, supplying the

market, and increases in the costs and time necessary to integrate acquired businesses into our operations successfully; 51



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• changes in our reporting units or in the structure of our business as a

result of future reorganizations, acquisitions or divestitures of assets

or businesses; and



• increases in our market-participant risk-adjusted WACC.

Negative changes in one or more of these factors, among others, could result in additional impairment charges. Liquidity and Capital Resources As of June 30, 2014, we had $357 million of cash and cash equivalents on hand, comprised of $28 million invested in money market and government funds, $126 million invested in short-term time deposits, and $203 million in interest bearing and non-interest bearing bank accounts. We invest excess cash on hand in short-term financial instruments that earn market interest rates while mitigating principal risk through instrument and counterparty diversification, as well as what we believe to be prudent instrument selection. We limit our direct exposure to securities in any one industry or issuer. We also have full access to our $2.000 billion revolving credit facility and our $300 million credit and security facility secured by our U.S. trade receivables, both described below. The following provides a summary and description of our net cash inflows (outflows) for the six months ended June 30, 2014 and 2013: Six Months Ended June 30, (in millions) 2014 2013



Cash provided by operating activities $ 483$ 584 Cash used for investing activities (189 ) (39 ) Cash used for financing activities (154 ) (221 )

Operating Activities During the first half of 2014, we generated $483 million from operating activities, as compared to $584 million during the first half of 2013, a decrease of $101 million or 17 percent. This decrease was primarily the result of increases in our inventory levels, as well as a litigation-related cash receipt in the first half of 2013, partially offset by reductions in our accounts receivable due to a government funded settlement of outstanding receivables in Spain of $80 million during the first quarter of 2014. Investing Activities During the first half of 2014, cash used for investing activities included $72 million of payments for acquisitions of businesses, net of cash acquired. Cash used for investing activities also included purchases of property, plant and equipment of $124 million. This was partially offset by proceeds from our divested businesses of $12 million. During the first half of 2013, cash used for investing activities included $15 million of payments to acquire certain technologies and privately-held securities. Cash used for investing activities also included purchases of property, plant and equipment of $104 million that were partially offset by $53 million of proceeds received from the sale of our Natick, Massachusetts headquarters in March 2013. In addition, in May 2014 we announced that we had entered into a definitive agreement to acquire the Interventional Division of Bayer AG for $415 million in cash at closing. We expect to close this transaction in the second half of 2014, subject to customary closing conditions. Financing Activities Our cash flows from financing activities reflect issuances and repayments of debt, payments of acquisition-related contingent consideration, proceeds from and cash used to net share settle stock issuances related to our equity incentive programs and repurchases of common stock pursuant to our authorized repurchase programs, discussed in Note L - Stockholders' Equity to our consolidated financial statements included in Item 8 of our 2013 Annual Report on Form 10-K. During the first half of 2014, we repurchased 10 million shares of our common stock for approximately $125 million, pursuant to our authorized repurchase programs. During the first half of 2013, we repurchased 26 million shares of our common stock for approximately $200 million.



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Debt

We hold investment-grade ratings with all three major credit-rating agencies. We believe our investment grade credit profile reflects the size and diversity of our product portfolio, our share position in several of our served markets, our strong cash flow, our solid financial fundamentals and our financial strategy. We had total debt of $4.255 billion as of June 30, 2014 and $4.240 billion as of December 31, 2013. The debt maturity schedule for the significant components of our debt obligations as of June 30, 2014 is as follows: (in millions) 2014 2015 2016 2017 2018 Thereafter Total Senior notes $ - $ 400$ 600$ 250$ 600$ 1,950$ 3,800 Term Loan - - 80 80 240 - 400 $ - $ 400$ 680$ 330$ 840$ 1,950$ 4,200



Note: The table above does not include unamortized discounts associated with our

senior notes, or amounts related to terminated interest rate contracts

used to hedge the fair value of certain of our senior notes.

Revolving Credit Facility We maintain a $2.000 billion revolving credit facility, maturing in April 2017, with a global syndicate of commercial banks. Eurodollar and multicurrency loans under this revolving credit facility bear interest at LIBOR plus an interest margin of between 0.875 percent and 1.475 percent, based on our corporate credit ratings and consolidated leverage ratio (1.275 percent as of June 30, 2014). In addition, we are required to pay a facility fee based on our credit ratings, consolidated leverage ratio, and the total amount of revolving credit commitments, regardless of usage, under the agreement (0.225 percent as of June 30, 2014). There were no amounts borrowed under our revolving credit facility as of June 30, 2014 or December 31, 2013. Our revolving credit facility agreement requires that we maintain certain financial covenants, as follows: Covenant Actual as of Requirement June 30, 2014 Maximum leverage ratio (1) 3.5 times 2.5 times



Minimum interest coverage ratio (2) 3.0 times 5.7 times

(1) Ratio of total debt to consolidated EBITDA, as defined by the credit agreement, for the preceding four consecutive fiscal quarters. (2) Ratio of consolidated EBITDA, as defined by the credit agreement, to interest expense for the preceding four consecutive fiscal quarters. The credit agreement provides for an exclusion from the calculation of consolidated EBITDA, as defined by the agreement, through the credit agreement 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 June 30, 2014, we had $181 million of the restructuring charge exclusion remaining. In addition, any cash litigation payments (net of any cash litigation receipts), as defined by the 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 agreement, provided that the sum of any excluded net cash litigation payments and any new debt issued to fund any tax deficiency payments shall not exceed $2.300 billion in the aggregate. As of June 30, 2014, we had approximately $2.150 billion of the combined legal and debt exclusion remaining. As of and through June 30, 2014, 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 facilities 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.



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Term Loan We had $400 million outstanding under an unsecured term loan facility as of June 30, 2014 and December 31, 2013. Term loan borrowings under this facility bear interest at LIBOR plus an interest margin of between 1.0 percent and 1.75 percent (currently 1.5 percent), based on our corporate credit ratings and consolidated leverage ratio. The term loan borrowings are payable over a five-year period, with quarterly principal payments of $20 million commencing in the first quarter of 2016 and the remaining principal amount due at the final maturity date in August 2018, and are repayable at any time without premium or penalty. Our term loan facility requires that we comply with certain covenants, including financial covenants with respect to maximum leverage and minimum interest coverage. The maximum leverage ratio requirement is 3.5 times and our actual leverage ratio as of June 30, 2014 is 2.5 times. The minimum interest coverage ratio requirement is 3.0 times and our actual interest coverage ratio as of June 30, 2014 is 5.7 times. Senior Notes We had senior notes outstanding of $3.800 billion as of June 30, 2014 and December 31, 2013. Our senior notes are publicly registered securities, 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 liabilities of our subsidiaries (see Other Arrangements below). Other Arrangements We also maintain a $300 million credit and security facility secured by our U.S. trade receivables maturing in June 2015, subject to further extension. The credit and security facility requires that we maintain a maximum leverage covenant consistent with our revolving credit facility. The maximum leverage ratio requirement is 3.5 times and our actual leverage ratio as of June 30, 2014 is 2.5 times. We had no borrowings outstanding under this facility as of June 30, 2014 and December 31, 2013. We have accounts receivable factoring programs in certain European countries that we account for as sales under ASC Topic 860, Transfers and Servicing. These agreements provide for the sale of accounts receivable to third parties, without recourse, of up to approximately $309 million as of June 30, 2014. 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 $162 million of receivables as of June 30, 2014 at an average interest rate of 3.1 percent, and $146 million as of December 31, 2013 at an average interest rate of 3.3 percent. Within Italy, Spain, Portugal and Greece the number of days our receivables are outstanding has remained above historical levels. We believe we have adequate allowances for doubtful accounts related to our Italy, Spain, Portugal and Greece accounts receivable; however, we continue to monitor the European economic environment for any collectibility issues related to our outstanding receivables. During the first half of 2014, we received cash payments of approximately $80 million related to a government-funded settlement of long outstanding receivables in Spain. As of June 30, 2014, our net receivables in these countries greater than 180 days past due totaled $41 million, of which $17 million were past due greater than 365 days. 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 21.0 billion Japanese yen (approximately $207 million as of June 30, 2014). We de-recognized $150 million of notes receivable as of June 30, 2014 at an average interest rate of 2.0 percent and $147 million of notes receivable as of December 31, 2013 at an average interest rate of 1.8 percent. De-recognized accounts and notes receivable are excluded from trade accounts receivable, net in the accompanying unaudited condensed consolidated balance sheets. As of June 30, 2014 and December 31, 2013, we had outstanding letters of credit of $78 million, which consisted primarily of bank guarantees and collateral for workers' compensation insurance arrangements. As of June 30, 2014 and December 31, 2013, 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 June 30, 2014 or December 31, 2013. 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.



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Equity

During the first half of 2014 and 2013, we received $33 million and $19 million, respectively, in proceeds from stock issuances related to our stock option and employee stock purchase plans. Proceeds from the exercise of employee stock options and employee stock purchases vary from period to period based upon, among other factors, fluctuations in the trading price of our common stock and in the exercise and stock purchase patterns of employees. We repurchased 10 million shares of our common stock during the first half of 2014 for $125 million and 26 million shares of our common stock during the first half of 2013 for $200 million, pursuant to our authorized repurchase programs discussed in Note L - Stockholders' Equity to our consolidated financial statements included in Item 8 of our 2013 Annual Report on Form 10-K. As of June 30, 2014, we had $535 million remaining authorization under our 2013 share repurchase program. Stock-based compensation expense related to our stock ownership plans was approximately $53 million for the first half of 2014 and $50 million for the first half of 2013. Contractual Obligations and Commitments Certain of our acquisitions involve the payment of contingent consideration. See Note B - Acquisitions to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q for further details regarding the estimated potential amount of future contingent consideration we could be required to pay associated with our acquisitions. There have been no other material changes to our contractual obligations and commitments as reported in our 2013 Annual Report filed on Form 10-K. Legal Matters 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 legal 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. 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.



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Our accrual for legal matters that are probable and estimable was $826 million as of June 30, 2014 and $607 million as of December 31, 2013, and includes estimated costs of settlement, damages and defense. 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. See further discussion of our material legal proceedings in Note J - Commitments and Contingencies to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q and in Note K - Commitments and Contingencies to our audited financial statements contained in Item 8 of our 2013 Annual Report on Form 10-K. Recent Accounting Pronouncements Information regarding new accounting pronouncements is included in Note N - New Accounting Pronouncements to our unaudited condensed consolidated financial statements contained in Item 1 of this Quarterly Report on Form 10-Q.



Additional Information

Use of Non-GAAP Financial Measures

To supplement our unaudited condensed consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP financial measures, including adjusted net income and adjusted net income per share that exclude certain amounts, and revenue growth rates that exclude the impact of changes in foreign currency exchange rates. These non-GAAP financial measures are not in accordance with generally accepted accounting principles in the United States. The GAAP financial measure most directly comparable to adjusted net income is GAAP net income and the GAAP financial measure most directly comparable to adjusted net income per share is GAAP net income per share. To calculate revenue growth rates that exclude the impact of changes in foreign currency exchange rates, we convert actual net sales from local currency to U.S. dollars using constant foreign currency exchange rates in the current and prior period. The GAAP financial measure most directly comparable to this non-GAAP financial measure is growth rate percentages using net sales on a GAAP basis. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP financial measure are included elsewhere in this Quarterly Report on Form 10-Q. Management uses these supplemental non-GAAP financial measures to evaluate performance period over period, to analyze the underlying trends in our business, to assess our performance relative to our competitors, and to establish operational goals and forecasts that are used in allocating resources. In addition, management uses these non-GAAP financial measures to further its understanding of the performance of our operating segments. The adjustments excluded from our non-GAAP financial measures are consistent with those excluded from our operating segments' measures of net sales and profit or loss. These adjustments are excluded from the segment measures that are reported to our chief operating decision maker that are used to make operating decisions and assess performance. We believe that presenting adjusted net income, adjusted net income per share, and revenue growth rates that exclude certain amounts and/or the impact of changes in foreign currency exchange rates, in addition to the corresponding GAAP financial measures, provides investors greater transparency to the information used by management for its financial and operational decision-making and allows investors to see our results "through the eyes" of management. We further believe that providing this information assists our investors in understanding our operating performance and the methodology used by management to evaluate and measure such performance. Adjusted net income, adjusted net income per share and revenue growth rates that exclude certain amounts and/or the impact of changes in foreign currency exchange rates are not in accordance with U.S. GAAP and should not be considered in isolation from or as a replacement for the most directly comparable GAAP financial measures. Further, other companies may calculate these non-GAAP financial measures differently than we do, which may limit the usefulness of those measures for comparative purposes.



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The following is an explanation of each of the adjustments that management excluded as part of these non-GAAP financial measures for the three and six months ended June 30, 2014 and 2013, as well as reasons for excluding each of these individual items: Adjusted Net Income and Adjusted Net Income per Share • Goodwill and other intangible asset impairment charges - This amount



represents (a) non-cash write-downs of certain intangible asset balances

in the second quarter of 2014; (b) non-cash write-downs of certain

intangible asset balances in the first quarter of 2014; (c) non-cash

write-downs of certain intangible asset balances in the second quarter of

2013; and (d) a non-cash write-down of our goodwill balance attributable

to our global Cardiac Rhythm Management reporting unit in the first

quarter of 2013. We remove the impact of non-cash impairment charges from

our operating performance to assist in assessing our cash generated from

operations. We believe this is a critical metric for us in measuring our

ability to generate cash and invest in our growth. Therefore, these

charges are excluded from management's assessment of operating

performance and are also excluded for purposes of calculating these

non-GAAP financial measures to facilitate an evaluation of our current

operating performance and a comparison to our past operating performance,

particularly in terms of liquidity.

• Acquisition and divestiture-related charges (credits) - These adjustments

consist of (a) contingent consideration fair value adjustments; (b) due diligence, other fees and exit costs; and (c) separation costs and gains primarily associated with the sale of our Neurovascular business in January 2011. The contingent consideration adjustments represent



accounting adjustments to state contingent consideration liabilities at

their estimated fair value. These adjustments can be highly variable

depending on the assessed likelihood and amount of future contingent

consideration payments. Due diligence, other fees and exit costs include

legal, tax, severance and other expenses associated with prior and potential future acquisitions and divestitures that can be highly variable and not representative of on-going operations. Separation costs and gains on the sale of a business unit primarily represent those



associated with the Neurovascular divestiture and are not representative

of on-going operations. Accordingly, management excluded these amounts

for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to our past operating performance. • Restructuring and restructuring-related costs (credits) - These adjustments represent primarily severance and other direct costs



associated with our 2014 Restructuring program and 2011 Restructuring

program. These costs are excluded by management in assessing our

operating performance, as well as from our operating segments' measures

of profit and loss used for making operating decisions and assessing

performance. Accordingly, management excluded these costs for purposes of

calculating these non-GAAP financial measures to facilitate an evaluation

of our current operating performance and a comparison to our past operating performance.



• Litigation-related net charges (credits) - These adjustments include

certain significant product liability and other litigation-related

charges and credits. These amounts are excluded by management in

assessing our operating performance, as well as from our operating

segments' measures of profit and loss used for making operating decisions

and assessing performance. Accordingly, management excluded these amounts

for purposes of calculating these non-GAAP financial measures to facilitate an evaluation of our current operating performance and a comparison to our past operating performance. • Discrete tax items - These items represent adjustments of certain tax



positions, which were initially established in prior periods as a result

of intangible asset impairment charges; or acquisition-, divestiture-,

restructuring- or litigation-related charges or credits. These

adjustments do not reflect expected on-going operating results.

Accordingly, management excluded these amounts for purposes of

calculating these non-GAAP financial measures to facilitate an evaluation

of our current operating performance and a comparison to our past operating performance. • Amortization expense - Amortization expense is a non-cash expense and



does not impact our liquidity or compliance with the covenants included

in our credit facility agreement. Management removes the impact of

amortization from our operating performance to assist in assessing our

cash generated from operations. We believe this is a critical metric for

measuring our ability to generate cash and invest in our growth.

Therefore, amortization expense is excluded from management's assessment

of operating performance and is also excluded from our operating

segments' measures of profit and loss used for making operating decisions

and assessing performance. Accordingly, management has excluded

amortization expense for purposes of calculating these non-GAAP financial

measures to facilitate an evaluation of our current operating performance, particularly in terms of liquidity. 57



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Revenue Growth Rates Excluding the Impact of Sales from Divested Businesses and/or Changes in Foreign Currency Exchange Rates • Sales from divested businesses and/or changes in foreign currency

exchange rates - Sales from divested businesses are primarily associated

with the Neurovascular divestiture and are not representative of on-going

operations. The impact of changes in foreign currency exchange rates is

highly variable and difficult to predict. Accordingly, management

excludes the impact of sales from divested businesses and/or changes in

foreign currency exchange rates for purposes of reviewing revenue growth

rates to facilitate an evaluation of our current operating performance

and a comparison to our past operating performance.

Safe Harbor for Forward-Looking Statements

Certain statements that we may make from time to time, including statements contained in this Quarterly Report on Form 10-Q and information incorporated by reference herein, constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements may be identified by words like "anticipate," "expect," "project," "believe," "plan," "may," "estimate," "intend" and similar words. These forward-looking statements are based on our beliefs, assumptions and estimates using information available to us at the time and are not intended to be guarantees of future events or performance. These forward-looking statements include, among other things, statements regarding our financial performance; our business and results of operations; our business strategy and related financial returns; our growth initiatives, including our emerging markets strategy and investments; acquisitions and related payments, the timing of acquisitions and the integration and impact of acquired businesses and technologies; the timing and impact of our restructuring and plant network optimization initiatives, including expected costs and cost savings; our cash flow and use thereof; our outstanding accounts receivable in Europe; the impact of changes in foreign currency exchange rates; changes in the market and our market share for our businesses; procedural volumes and pricing pressures; competitive pressures facing our businesses; clinical trials, including timing and results; our warranty programs; our product portfolio; product development and iterations; new and existing product launches, including their timing and acceptance, and their impact on the market, our market share and our business; expanding our global footprint; competitive product launches; product performance and our ability to gain a competitive advantage; the strength of our technologies and pipeline; regulatory approvals, including their timing; our regulatory and quality compliance; expected research and development efforts and the allocation of research and development expenditures; our sales and marketing strategy; reimbursement practices; the ability of our suppliers and sterilizers to meet our requirements; our ability to meet customer demand; goodwill and other intangible asset impairment analysis and charges; our fair value measurements; the effect of new accounting pronouncements on our financial results; the impact of healthcare reform legislation and new and proposed tax laws; the outcome and timing of transfer pricing and transactional-related matters pending before taxing authorities; our tax position and income tax reserves and our ability to realize all of our deferred tax assets; the outcome and impact of intellectual property, qui tam actions, governmental investigations and proceedings and litigation matters; adequacy of our reserves; the drivers and impact of our investment ratings; anticipated expenses and capital expenditures and our ability to finance them; and our ability to meet the financial covenants contained in our credit facilities, or to renegotiate the terms of or obtain waivers for compliance with those covenants. If our underlying assumptions turn out to be incorrect, or if certain risks or uncertainties materialize, actual results could vary materially from the expectations and projections expressed or implied by our forward-looking statements. As a result, readers are cautioned not to place undue reliance on any of our forward-looking statements. Except as required by law, we do not intend to update any forward-looking statements even if new information becomes available or other events occur in the future. The forward-looking statements in this Quarterly Report on Form 10-Q are based on certain risks and uncertainties, including the risk factors described in "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q, "Part I, Item 1A. Risk Factors" in our 2013 Annual Report on Form 10-K and the specific risk factors discussed below and in connection with forward-looking statements throughout this Quarterly Report on Form 10-Q, which could cause actual results to vary materially from the expectations and projections expressed or implied by our forward-looking statements. These factors, in some cases, have affected and in the future could affect our ability to implement our business strategy and may cause actual results to differ materially from those contemplated by the forward-looking statements. These additional factors include, among other things, future political, economic, competitive, reimbursement and regulatory conditions; new product introductions; demographic trends; intellectual property; litigation and governmental investigations; financial market conditions; and future business decisions made by us and our competitors, all of which are difficult or impossible to predict accurately and many of which are beyond our control. We caution each reader of this Quarterly Report on Form 10-Q to consider carefully these factors. The following are some of the important risk factors that could cause our actual results to differ materially from our expectations in any forward-looking statements. For further discussion of these and other risk factors, see "Item 1A. Risk Factors" of this Quarterly Report on Form 10-Q and "Part I, Item 1A. Risk Factors" in our 2013 Annual Report on Form 10-K.



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Our Businesses

• Our ability to increase CRM net sales, including for both new and replacement units, expand the market and capture market share;



• The volatility of the coronary stent market and our ability to increase

our drug-eluting stent systems net sales, including with respect to our

SYNERGY™, PROMUS® Element™ and Promus PREMIER™ stent systems, and capture

market share; • The on-going impact on our business, including CRM and coronary stent businesses, of physician alignment to hospitals, governmental



investigations and audits of hospitals, and other market and economic

conditions on the overall number of procedures performed, including with respect to the drug-eluting coronary stent market the average number of stents used per procedure, and average selling prices;



• Competitive offerings and related declines in average selling prices for

our products, particularly our drug-eluting coronary stent systems and our

CRM products;



• The performance of, and physician and patient confidence in, our products

and technologies, including our coronary drug-eluting stent systems and CRM products, or those of our competitors;



• The impact and outcome of ongoing and future clinical trials, including

coronary stent and CRM clinical trials, and market studies undertaken by

us, our competitors or other third parties, or perceived product performance of our or our competitors' products;



• Variations in clinical results, reliability or product performance of our

and our competitor's products; • Our ability to timely and successfully acquire or develop, launch and supply new or next-generation products and technologies worldwide and across our businesses in line with our commercialization strategies, including our S-ICD® system and the pending acquisition of the Interventional Division of Bayer AG;



• The effect of consolidation and competition in the markets in which we do

business, or plan to do business;



• Disruption in the manufacture or supply of certain components, materials

or products, or the failure to timely secure alternative manufacturing or

additional or replacement components, materials or products; • Our ability to retain and attract key personnel, including in our



cardiology and CRM sales force and other key cardiology and CRM personnel;

• The impact of enhanced requirements to obtain regulatory approval in the

United States and around the world, including the associated timing and cost of product approval; and • The impact of increased pressure on the availability and rate of



third-party reimbursement for our products and procedures in the United

States and around the world, including with respect to the timing and

costs of creating and expanding markets for new products and technologies.

Regulatory Compliance and Litigation

• The impact of healthcare policy changes and legislative or regulatory

efforts in the United States and around the world to modify product

approval or reimbursement processes, including a trend toward

demonstrating clinical outcomes, comparative effectiveness and cost

efficiency, as well as the impact of other healthcare reform legislation;

• Risks associated with our regulatory compliance and quality systems and

activities in the United States and around the world, including meeting

regulatory standards applicable to manufacturing and quality processes;

• Our ability to minimize or avoid future field actions or FDA warning

letters relating to our products and processes and the on-going inherent

risk of potential physician advisories related to medical devices; 59



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• The impact of increased scrutiny of and heightened global regulatory

enforcement facing the medical device industry arising from political and

regulatory changes, economic pressures or otherwise, including under U.S. Anti-Kickback Statute, U.S. False Claims Act and similar laws in other



jurisdictions; U.S. Foreign Corrupt Practices Act (FCPA) and/or similar

laws in other jurisdictions, and U.S. and foreign export control, trade embargo and custom laws;



• The effect of our litigation and risk management practices, including

self-insurance, and compliance activities on our loss contingencies, legal provision and cash flows;



• The impact of, diversion of management attention as a result of, and costs

to cooperate with, litigate and/or resolve, governmental investigations

and our class action, product liability, contract and other legal proceedings; and



• Risks associated with a failure to protect our intellectual property

rights and the outcome of patent litigation.

Innovation and Certain Growth Initiatives

• The timing, size and nature of our strategic growth initiatives and market

opportunities, including with respect to our internal research and

development platforms and externally available research and development

platforms and technologies, and the ultimate cost and success of those

initiatives and opportunities;



• Our ability to complete planned clinical trials successfully, obtain

regulatory approvals and launch new and next generation products in a

timely manner consistent with cost estimates, including the successful

completion of in-process projects from in-process research and development; • Our ability to identify and prioritize our internal research and development project portfolio and our external investment portfolio on profitable revenue growth opportunities as well as to keep them in line



with the estimated timing and costs of such projects and expected revenue

levels for the resulting products and technologies;



• Our ability to successfully develop, manufacture and market new products

and technologies in a timely manner and the ability of our competitors and

other third parties to develop products or technologies that render our products or technologies noncompetitive or obsolete;



• The impact of our failure to succeed at or our decision to discontinue,

write-down or reduce the funding of any of our research and development

projects, including in-process projects from in-process research and development, in our growth adjacencies or otherwise; • Dependence on acquisitions, alliances or investments to introduce new



products or technologies and to enter new or adjacent growth markets, and

our ability to fund them or to fund contingent payments with respect to those acquisitions, alliances and investments; and



• The failure to successfully integrate and realize the expected benefits

from the strategic acquisitions, alliances and investments we have consummated or may consummate in the future.



International Markets

• Our dependency on international net sales to achieve growth, including in

emerging markets;



• The impact of changes in our international structure and leadership;

• Risks associated with international operations and investments, including

the timing and collectibility of customer payments, political and economic

conditions, protection of our intellectual property, compliance with established and developing U.S. and foreign legal and regulatory requirements, including FCPA and similar laws in other jurisdictions and



U.S. and foreign export control, trade embargo and custom laws, as well as

changes in reimbursement practices and policies;

• Our ability to maintain or expand our worldwide market positions in the

various markets in which we compete or seek to compete, including through

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• Our ability to execute and realize anticipated benefits from our investments in emerging markets; and • The potential effect of foreign currency fluctuations and interest rate fluctuations on our net sales, expenses and resulting margins.



Liquidity

• Our ability to generate sufficient cash flow to fund operations, capital

expenditures, global expansion initiatives, litigation settlements, share

repurchases and strategic investments and acquisitions as well as

maintaining our investment grade ratings and managing our debt levels and

covenant compliance;



• Our ability to access the public and private capital markets when desired

and to issue debt or equity securities on terms reasonably acceptable to

us;



• The unfavorable resolution of open tax matters, exposure to additional tax

liabilities and the impact of changes in U.S. and international tax laws;



• The impact of examinations and assessments by domestic and international

taxing authorities on our tax provision, financial condition or results of

operations;



• The impact of goodwill and other intangible asset impairment charges,

including on our results of operations; and • Our ability to collect outstanding and future receivables and/or sell receivables under our factoring programs.



Cost Reduction and Optimization Initiatives

• Risks associated with significant changes made or expected to be made to

our organizational and operational structure, pursuant to our 2014

Restructuring plan, 2011 Restructuring plan as expanded as well as any

further restructuring or optimization plans we may undertake in the

future, and our ability to recognize benefits and cost reductions from

such programs; and



• Business disruption and employee distraction as we execute our global

compliance program, restructuring and optimization plans and divestitures

of assets or businesses and implement our other strategic and cost

reduction initiatives.


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