NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in millions, except share data, per share data and where indicated)
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1.
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Background and Basis of Presentation
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Background
Mallinckrodt plc is a global business consisting of multiple wholly owned subsidiaries (collectively, "Mallinckrodt" or "the Company") that develop, manufacture, market and distribute specialty pharmaceutical products and therapies. Areas of focus include autoimmune and rare diseases in specialty areas like neurology, rheumatology, nephrology, pulmonology and ophthalmology; immunotherapy and neonatal respiratory critical care therapies; analgesics and gastrointestinal products.
The Company operates in two reportable segments, which are further described below:
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•
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Specialty Brands includes innovative specialty pharmaceutical brands (inclusive of Amitiza® (lubiprostone) ("Amitiza"); and
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•
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Specialty Generics includes niche specialty generic drugs and active pharmaceutical ingredients ("API(s)").
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During the nine months ended September 27, 2019, the Company experienced a change in its reportable segments, which primarily served to move the results related to Amitiza to the Specialty Brands segment from the Specialty Generics segment. All prior period segment information has been recast to reflect the realignment of the Company's reportable segments on a comparable basis.
The Company owns or has rights to use the trademarks and trade names that are used in conjunction with the operation of its business. One of the more important trademarks that the Company owns or has rights to use that appears in this Quarterly Report on Form 10-Q is "Mallinckrodt," which is a registered trademark or the subject of pending trademark applications in the United States ("U.S.") and other jurisdictions. Solely for convenience, the Company only uses the ™ or ® symbols the first time any trademark or trade name is mentioned in the following notes. Such references are not intended to indicate in any way that the Company will not assert, to the fullest extent permitted under applicable law, its rights to its trademarks and trade names. Each trademark or trade name of any other company appearing in the following notes is, to the Company's knowledge, owned by such other company.
Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and entities in which they own or control more than 50% of the voting shares, or have the ability to control through similar rights. All intercompany balances and transactions have been eliminated in consolidation and all normal recurring adjustments necessary for a fair presentation have been included in the results reported. The results of entities disposed of are included in the unaudited condensed consolidated financial statements up to the date of disposal, and where appropriate, these operations have been reported in discontinued operations. Divestitures of product lines and businesses not meeting the criteria for discontinued operations have been reflected in operating income. The fiscal year end balance sheet data was derived from audited consolidated financial statements, but do not include all of the annual disclosures required by GAAP; accordingly these unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 28, 2018 filed with the U.S. Securities and Exchange Commission ("SEC") on February 26, 2019.
Beginning in the first quarter through the third quarter of fiscal 2018, the historical financial results attributable to "the Specialty Generics Disposal Group" were reflected in the Company's interim unaudited condensed consolidated financial statements as discontinued operations. As a result of the December 6, 2018 spin-off announcement of the Specialty Generics business, the Specialty Generics Disposal Group no longer met the requirements to be classified as held for sale, and the historical financial results attributable to the Specialty Generics Disposal Group were recast as continuing operations in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2018, as well as the unaudited condensed consolidated financial statements for the prior periods as presented herein. During the three months ended September 27, 2019, the Company announced that it had suspended for now its previously announced plans to spin off the Specialty Generics business.
Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of December. Unless otherwise indicated, the three and nine months ended September 27, 2019 refers to the thirteen and thirty-nine week periods ended September 27, 2019 and the three and nine months ended September 28, 2018 refers to the thirteen and thirty-nine week periods ended September 28, 2018.
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2.
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Recently Issued Accounting Standards
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The Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," in February 2018. This ASU allows for a reclassification from accumulated other comprehensive income ("AOCI") to retained earnings for the stranded tax effects arising from the change in the reduction of the U.S. federal statutory income tax rate from 35% to 21%. The Company adopted this standard as of day 1 of fiscal 2019, which resulted in a reclassification between AOCI and retained deficit of $0.5 million, and had no impact on the Company's results of operations or financial position.
The FASB issued ASU 2016-02, "Leases," in February 2016. This ASU was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset. The FASB subsequently issued additional ASUs to clarify the guidance of ASU 2016-02 ("Topic 842,") as amended. The Company adopted this standard as of day 1 of fiscal 2019 utilizing the modified transition approach expedient, which allows an entity to elect not to recast its comparative periods in the period of adoption. In addition, the Company elected to use the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification. The Company also elected the hindsight practical expedient to determine the lease term for existing leases. Adoption of the new standard resulted in the recording of additional lease assets and corresponding liabilities of $83.1 million and $99.7 million, respectively, as of day 1 of fiscal 2019. Refer to Note 10 for further details on the Company's leases.
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3.
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Revenue from Contracts with Customers
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Product Sales Revenue
See Note 17 for presentation of the Company's net sales by product family.
Reserves for variable consideration
The following table reflects activity in the Company's sales reserve accounts:
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Rebates and Chargebacks
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Product Returns
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Other Sales Deductions
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Total
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Balance as of December 29, 2017
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$
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327.4
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$
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34.5
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$
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14.7
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$
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376.6
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Provisions
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1,644.5
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32.0
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47.5
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1,724.0
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Payments or credits
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(1,623.9
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)
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(30.5
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(47.2
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(1,701.6
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Balance as of September 28, 2018
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$
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348.0
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$
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36.0
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$
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15.0
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$
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399.0
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Balance as of December 28, 2018
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$
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354.3
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$
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34.0
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$
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17.1
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$
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405.4
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Provisions
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1,772.9
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18.8
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50.7
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1,842.4
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Payments or credits
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(1,844.4
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)
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(22.9
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(41.2
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(1,908.5
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Balance as of September 27, 2019
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$
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282.8
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$
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29.9
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$
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26.6
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$
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339.3
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Product sales transferred to customers at a point in time and over time were as follows:
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Three Months Ended
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Nine Months Ended
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September 27,
2019
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September 28,
2018
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September 27,
2019
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September 28,
2018
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Product sales transferred at a point in time
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81.4
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%
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83.1
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%
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81.7
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%
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82.8
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%
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Product sales transferred over time
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18.6
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%
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16.9
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%
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18.3
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%
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17.2
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%
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Transaction price allocated to the remaining performance obligations
The following table includes estimated revenue from contracts extending greater than one year for certain of the Company's hospital products that are expected to be recognized in the future related to performance obligations that were unsatisfied or partially unsatisfied as of September 27, 2019:
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Remainder of Fiscal 2019
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$
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44.6
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Fiscal 2020
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168.3
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Fiscal 2021
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72.4
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Fiscal 2022
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16.5
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Thereafter
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6.2
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Costs to fulfill a contract
As of September 27, 2019 and December 28, 2018, the total net book value of the devices used in the Company's portfolio of drug-device combination products, which are used in satisfying future performance obligations, were $26.4 million and $28.4 million, respectively, and are classified in property, plant and equipment, net, on the unaudited condensed consolidated balance sheets. The associated depreciation expense recognized during the nine months ended September 27, 2019 and September 28, 2018 was $5.1 million and $8.5 million, respectively.
Product Royalty Revenues
The Company licenses certain rights to Amitiza to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur. The royalty rates consist of several tiers ranging from 18% to 26% with the royalty rate resetting every year. The associated royalty revenue recognized was as follows:
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Three Months Ended
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Nine Months Ended
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September 27,
2019
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September 28,
2018
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September 27,
2019
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September 28,
2018
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Royalty revenue
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$
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19.5
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$
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22.5
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$
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56.3
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$
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52.1
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Royalty revenue for the three and nine months ended September 28, 2018 reflects royalty revenue for the period subsequent to the Company's February 2018 acquisition of Sucampo Pharmaceuticals, Inc. ("Sucampo Acquisition").
Contract Liabilities
The following table reflects the balance of the Company's contract liabilities at the end of the respective periods:
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September 27,
2019
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December 28,
2018
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Accrued and other current liabilities
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$
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5.9
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$
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20.4
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Other liabilities
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0.6
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15.1
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Contract liabilities
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$
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6.5
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$
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35.5
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Revenue recognized during the nine months ended September 27, 2019 from amounts included in contract liabilities at the beginning of the period was $10.3 million inclusive of the Company's wholly owned subsidiary BioVectra Inc. ("BioVectra"), which was classified as held for sale as of September 27, 2019.
In September 2019, the Company entered into an agreement to sell BioVectra to an affiliate of H.I.G. Capital for up to $250.0 million, including fixed consideration of $175.0 million, comprised of an upfront payment of $135.0 million and a long-term note for $40.0 million and contingent payments of up to $75.0 million. See Note 19 for updates to the deal structure that were made in conjunction with the completed sale of BioVectra on November 4, 2019.
The results related to BioVectra are reported under the Specialty Brands segment.
The following table summarizes the assets and liabilities of BioVectra that are classified as held for sale on the unaudited condensed consolidated balance sheet at the end of the respective period:
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September 27,
2019
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Carrying amounts of major classes of assets included as held for sale
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Accounts receivable
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$
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15.6
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Inventories
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14.7
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Property, plant and equipment, net
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103.4
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Intangible assets, net
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14.5
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Other current and non-current assets
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27.7
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Total assets classified as held for sale on the balance sheet
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$
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175.9
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Carrying amounts of major classes of liabilities included as held for sale
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Accounts payable
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$
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9.9
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Other current and non-current liabilities
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45.9
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Total liabilities classified as held for sale on the balance sheet
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$
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55.8
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5.
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Restructuring and Related Charges
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In July 2016, the Company's Board of Directors approved a $100.0 million to $125.0 million restructuring program (the "2016 Mallinckrodt Program"), designed to further improve its cost structure as the Company continues to transform its business. The 2016 Mallinckrodt Program included actions across the Specialty Brands segment and the Specialty Generics segment, as well as within the corporate functions. The 2016 Mallinckrodt Program was substantially completed in fiscal 2018.
In February 2018, the Company's Board of Directors approved a $100.0 million to $125.0 million restructuring program (the "2018 Mallinckrodt Program") that is of similar design as the 2016 Mallinckrodt Program. The utilization of the 2018 Mallinckrodt Program commenced upon substantial completion of the 2016 Mallinckrodt Program. There is no specified time period associated with the 2018 Mallinckrodt Program.
In addition to the 2018 and 2016 Mallinckrodt Programs, the Company has taken restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges by segment were as follows:
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Three Months Ended
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Nine Months Ended
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September 27,
2019
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September 28,
2018
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September 27,
2019
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September 28,
2018
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Specialty Brands
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$
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—
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$
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4.9
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$
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0.4
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$
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52.4
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Specialty Generics
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6.7
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0.1
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9.3
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5.3
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Corporate
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0.5
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14.6
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1.5
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48.9
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Restructuring and related charges, net
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7.2
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19.6
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11.2
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106.6
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Less: accelerated depreciation
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—
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(4.8
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)
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—
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(4.8
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)
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Restructuring charges, net
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$
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7.2
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$
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14.8
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$
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11.2
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$
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101.8
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Net restructuring and related charges by program were comprised of the following:
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Three Months Ended
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Nine Months Ended
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September 27,
2019
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September 28,
2018
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September 27,
2019
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September 28,
2018
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2018 Mallinckrodt Program
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$
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6.7
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$
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5.2
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$
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9.3
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$
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5.2
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2016 Mallinckrodt Program
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0.5
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9.8
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2.7
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70.2
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Acquisition Programs
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—
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4.6
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(0.8
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)
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31.2
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Total
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7.2
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19.6
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11.2
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106.6
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Less: non-cash charges, including accelerated depreciation
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—
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(4.8
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)
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—
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(4.8
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)
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Total charges expected to be settled in cash
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$
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7.2
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$
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14.8
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$
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11.2
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$
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101.8
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The following table summarizes cash activity for restructuring reserves, substantially all of which related to contract termination costs, employee severance and benefits, and exiting certain facilities:
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2018 Mallinckrodt Program
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2016 Mallinckrodt Program
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Acquisition Programs
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Total
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Balance as of December 28, 2018
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$
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2.2
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$
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61.0
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$
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7.8
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$
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71.0
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Charges
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10.4
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3.1
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—
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13.5
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Changes in estimate
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(1.1
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)
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(0.4
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)
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(0.8
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)
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(2.3
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)
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Cash payments
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(6.9
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)
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(12.3
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)
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(1.9
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)
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(21.1
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)
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Reclassifications (1)
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—
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(5.0
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)
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(4.3
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)
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(9.3
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)
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Currency translation
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—
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(1.7
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)
|
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—
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|
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(1.7
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)
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Balance as of September 27, 2019
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$
|
4.6
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|
|
$
|
44.7
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$
|
0.8
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|
|
$
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50.1
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|
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(1)
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Represents the reclassification of lease liabilities, net to lease liabilities and lease assets, which are reflected within other liabilities and other assets on the unaudited condensed consolidated balance sheet, due to the adoption of ASU 2016-02.
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As of September 27, 2019, net restructuring and related charges incurred cumulative to date were as follows:
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|
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|
|
|
|
|
|
|
2018 Mallinckrodt Program
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2016 Mallinckrodt Program
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|
Specialty Brands
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$
|
3.0
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$
|
82.2
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Specialty Generics
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9.3
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|
|
14.6
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Corporate
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2.2
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|
28.1
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|
|
|
$
|
14.5
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|
|
$
|
124.9
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All of the restructuring reserves were included in accrued and other current liabilities on the Company's unaudited condensed consolidated balance sheets.
The Company recognized an income tax benefit of $27.6 million on a loss from continuing operations before income taxes of $28.5 million for the three months ended September 27, 2019, and an income tax benefit of $122.9 million on a loss from continuing operations before income taxes of $8.7 million for the three months ended September 28, 2018. This resulted in effective tax rates of 96.8% and 1,412.6% for the three months ended September 27, 2019 and September 28, 2018, respectively. The income tax benefit for the three months ended September 27, 2019 was comprised of $3.3 million of current tax expense and $30.9 million of deferred tax benefit, which was predominately related to previously acquired intangibles and the generation of tax loss and credit carryforwards net of valuation allowances. The income tax benefit for the three months ended September 28, 2018 was comprised of $8.5 million of current tax expense and $131.4 million of deferred tax benefit. The deferred tax benefit was predominantly related to previously acquired intangibles and the generation of net operating losses.
The Company recognized an income tax benefit of $256.6 million on a loss from continuing operations before income taxes of $102.8 million for the nine months ended September 27, 2019, and an income tax benefit of $203.9 million on a loss from continuing
operations before income taxes of $107.4 million for the nine months ended September 28, 2018. This resulted in effective tax rates of 249.6% and 189.9% for the nine months ended September 27, 2019 and September 28, 2018, respectively. The income tax benefit for the nine months ended September 27, 2019 was comprised of $47.4 million of current tax expense and $304.0 million of deferred tax benefit. The deferred tax benefit was predominantly related to previously acquired intangibles, the generation of tax loss and credit carryforwards net of valuation allowances, the non-restructuring impairment charge, as well as the reorganization of the Company's intercompany financing and associated legal entity ownership, which eliminated the interest-bearing deferred tax obligation. The income tax benefit for the nine months ended September 28, 2018 was comprised of $29.8 million of current tax expense and $233.7 million of deferred tax benefit. The deferred tax benefit was predominantly related to previously acquired intangibles and the generation of net operating losses.
The income tax benefit was $27.6 million for the three months ended September 27, 2019, compared with a tax benefit of $122.9 million for the three months ended September 28, 2018. The $95.3 million net decrease in the tax benefit included a $92.5 million decrease attributed to the tax benefit from the reorganization of the Company's intercompany financing and associated legal entity ownership, a $18.6 million decrease attributed to changes in the timing, amount and jurisdictional mix of income, partially offset by an increase in tax benefit of $9.3 million attributable to an adjustment to the fiscal 2018 income tax provision for various tax return filings and a $6.5 million increase attributed to separation costs.
The income tax benefit was $256.6 million for the nine months ended September 27, 2019, compared with a tax benefit of $203.9 million for the nine months ended September 28, 2018. The $52.7 million net increase in the tax benefit included an increase of $97.2 million attributed to the tax benefit from the reorganization of the Company's intercompany financing and associated legal entity ownership, a $10.1 million increase attributed to separation costs, and an $8.5 million increase attributed to the non-restructuring impairment charge, partially offset by a decrease in tax benefit of $41.8 million predominately attributed to changes in the timing, amount and jurisdictional mix of income, a $11.2 million decrease attributed to net restructuring and related charges and a $10.1 million decrease attributed to the gain on debt repurchased.
During the nine months ended September 27, 2019, the Company completed a reorganization of its intercompany financing and associated legal entity ownership in response to the changing global tax environment. As a result, during the nine months ended September 27, 2019, the Company recognized current income tax expense of $28.9 million and a deferred income tax benefit of $215.7 million with a corresponding reduction to net deferred tax liabilities. The reduction in net deferred tax liabilities was comprised of a decrease in interest-bearing deferred tax obligations which resulted in the elimination of the December 28, 2018 balance of $227.5 million, a $35.4 million increase to a deferred tax asset related to excess interest carryforwards, a $26.4 million increase in various other net deferred tax liabilities and a $20.8 million decrease to a deferred tax asset related to tax loss and credit carryforwards net of valuation allowances. The elimination of the interest-bearing deferred tax obligation also eliminated the annual Internal Revenue Code section 453A interest expense.
During the nine months ended September 27, 2019, and the fiscal year ended December 28, 2018, the net cash payments for income taxes were $30.1 million and $12.4 million, respectively. During the three months ended June 28, 2019, the Company filed its U.S. Federal income tax return for the period ended September 28, 2018 reporting a U.S. Federal net operating loss carryforward expiring in fiscal 2038. As of September 27, 2019, the Company’s U.S. Federal net operating loss carryforward was $849.3 million ($178.4 million measured at applicable statutory tax rates and net of uncertain tax positions).
On August 5, 2019, the Internal Revenue Service ("IRS") proposed an adjustment to the taxable income of Mallinckrodt Hospital Products Inc. (“MHP”) (formerly known as Cadence Pharmaceuticals, Inc.) as a result of its findings in the audit of MHP’s tax year ended September 26, 2014. The proposed adjustment to taxable income of $871.0 million, excluding potential associated interest and penalties, is proposed as a multi-year adjustment and may result in a non-cash reduction of the Company’s U.S. Federal net operating loss carryforward of $849.3 million. The Company strongly disagrees with the proposed adjustment and intends to contest it through all available administrative and judicial remedies, which may take a number of years to conclude. See Note 15 for further details.
The Company's unrecognized tax benefits, excluding interest, totaled $439.4 million and $287.7 million as of September 27, 2019 and December 28, 2018, respectively. The net increase of $151.7 million primarily resulted from a net increase to current year tax positions of $152.3 million, net increases from prior period tax positions of $13.5 million, a net decrease from settlements of $1.0 million and a net decrease from a lapse of statute of limitations of $13.1 million. If favorably settled, $429.9 million of unrecognized tax benefits as of September 27, 2019 would benefit the effective tax rate, of which up to $20.0 million may be reported in discontinued operations. The total amount of accrued interest and penalties related to these obligations was $43.4 million and $37.1 million as of September 27, 2019 and December 28, 2018, respectively.
It is reasonably possible that within the next twelve months the unrecognized tax benefits could decrease by up to $111.2 million and the amount of related interest and penalties could decrease by up to $33.3 million as a result of payments or releases due to the resolution of various U.K. and non-U.K. examinations, appeals and litigation and the expiration of various statutes of limitation.
Due to a legislative change during the nine months ended September 27, 2019, the overall corporate income tax rate in Luxembourg has decreased from 26.0% to 24.9% effective January 1, 2019. As a result, the Company’s net deferred tax assets associated with the Luxembourg jurisdiction decreased by approximately $65.8 million, and the associated valuation allowances were also decreased by this same amount.
Basic earnings per share is computed by dividing net income by the number of weighted-average shares outstanding during the period. Diluted earnings per share is computed using the weighted-average shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represent the incremental ordinary shares issuable for restricted share units and share option exercises. The Company calculates the dilutive effect of outstanding restricted share units and share options on earnings per share by application of the treasury stock method. Dilutive securities, including participating securities, are not included in the computation of loss per share when the Company reports a net loss from continuing operations as the impact would be anti-dilutive.
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings per share were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
September 28,
2018
|
|
September 27,
2019
|
|
September 28,
2018
|
|
Basic
|
84.0
|
|
|
83.2
|
|
|
83.8
|
|
|
84.2
|
|
|
Dilutive impact of restricted share units and share options
|
—
|
|
|
1.8
|
|
|
0.4
|
|
|
1.0
|
|
|
Diluted
|
84.0
|
|
|
85.0
|
|
|
84.2
|
|
|
85.2
|
|
The computation of diluted weighted-average shares outstanding for both the three and nine months ended September 27, 2019 excluded approximately 7.1 million shares of equity awards, and for both the three and nine months ended September 28, 2018 excluded approximately 3.4 million shares of equity awards, because the effect would have been anti-dilutive.
Inventories were comprised of the following at the end of the respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27,
2019
|
|
December 28,
2018
|
|
Raw materials and supplies
|
$
|
56.6
|
|
|
$
|
69.2
|
|
|
Work in process
|
176.6
|
|
|
167.6
|
|
|
Finished goods
|
92.3
|
|
|
85.5
|
|
|
|
$
|
325.5
|
|
|
$
|
322.3
|
|
|
|
|
|
|
|
9.
|
Property, Plant and Equipment
|
The gross carrying amount and accumulated depreciation of property, plant and equipment were comprised of the following at the end of the respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27,
2019
|
|
December 28, 2018
|
|
Property, plant and equipment, gross
|
$
|
1,880.9
|
|
|
$
|
1,936.2
|
|
|
Less: accumulated depreciation
|
(986.2
|
)
|
|
(954.2
|
)
|
|
Property, plant and equipment, net
|
$
|
894.7
|
|
|
$
|
982.0
|
|
Depreciation expense for property, plant and equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
September 28,
2018
|
|
September 27,
2019
|
|
September 28,
2018
|
|
Depreciation expense
|
$
|
24.5
|
|
|
$
|
15.7
|
|
|
$
|
73.7
|
|
|
$
|
50.5
|
|
The Company assesses all contracts at inception to determine whether a lease exists. The Company leases office space, manufacturing and warehousing facilities, equipment and vehicles, all of which are operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has lease agreements with lease and non-lease components, which are accounted for separately. The Company's lease agreements do not contain variable lease payments or any material residual value guarantees.
Lease assets and liabilities are recognized based on the present value of the future minimum lease payments over the lease term as of the commencement date. As the Company's leases do not generally provide an implicit rate, the Company utilized its incremental borrowing rate based on the information available at commencement date in determining the present value of future lease payments. The Company used the incremental borrowing rate on December 29, 2018 for leases that commenced prior to that date. Most leases include one or more options to terminate or renew, with renewal terms that can extend the lease term from one to five years. The exercise of lease renewal options is at the Company's sole discretion. Termination and renewal options are included within the lease assets and liabilities only to the extent they are reasonably certain.
Lease assets and liabilities were reported in the following unaudited condensed consolidated balance sheet captions in the amounts shown:
|
|
|
|
|
|
|
|
|
September 27,
2019
|
|
Other assets
|
$
|
84.7
|
|
|
|
|
|
Accrued and other current liabilities
|
$
|
18.8
|
|
|
Other liabilities
|
72.1
|
|
|
Total lease liabilities
|
$
|
90.9
|
|
Dependent on the nature of the leased asset, lease expense is included within cost of sales or selling, general and administrative expenses ("SG&A"). The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
September 27,
2019
|
|
Lease cost:
|
|
|
|
|
Operating lease cost
|
$
|
5.4
|
|
|
$
|
15.6
|
|
|
Short-term lease cost
|
1.0
|
|
|
3.2
|
|
|
Sublease income
|
(0.2
|
)
|
|
(0.6
|
)
|
|
Total lease cost
|
$
|
6.2
|
|
|
$
|
18.2
|
|
Lease terms and discount rates were as follows:
|
|
|
|
|
|
|
|
September 27,
2019
|
|
Weighted-average remaining lease term (in years) - operating lease
|
7.5
|
|
|
Weighted-average discount rate - operating leases
|
3.8
|
%
|
Maturities of lease liabilities as of September 27, 2019 were as follows:
|
|
|
|
|
|
|
|
Remainder of Fiscal 2019
|
$
|
5.7
|
|
|
Fiscal 2020
|
21.6
|
|
|
Fiscal 2021
|
16.7
|
|
|
Fiscal 2022
|
12.6
|
|
|
Fiscal 2023
|
11.7
|
|
|
Thereafter
|
36.7
|
|
|
Total lease payments
|
105.0
|
|
|
Less: Interest
|
(14.1
|
)
|
|
Present value of lease liabilities
|
$
|
90.9
|
|
Other supplemental cash flow information related to leases were as follows:
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
Operating cash flows from operating leases
|
$
|
17.1
|
|
|
Lease assets obtained in exchange for lease obligations:
|
|
|
Operating leases
|
7.7
|
|
Stannsoporfin
During the three months ended June 28, 2019, the Company recognized a full impairment on its in-process research and development ("IPR&D") asset related to stannsoporfin of $113.5 million as the Company will no longer pursue this development product.
VTS-270
VTS-270 is the Company’s development product to treat Niemann-Pick Type C, a complicated, ultra-rare neurodegenerative disease that typically presents in childhood and is ultimately fatal. The results of the Company’s completed registration trial for the product did not show a statistically significant separation from placebo. Neither the VTS-270 nor the placebo arm showed disease progression as would be expected for a neurodegenerative condition over 52 weeks of observation. The U.S. Food and Drug Administration ("FDA") indicated to the Company at a Type A meeting in August 2018 that their view on the potential approvability will be based on the totality of data, not a single study or endpoint. Accordingly, the Company’s review of the data from the Phase 2b/3 trial, including the longer term open label portion, continues to proceed and is being assessed in combination with several other available data sources. A better understanding of the potential benefit of VTS-270 will emerge as the Company carefully considers the totality of data available and continues to work with the primary investigators and the FDA to define a viable path to a new drug application (NDA). The Company will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated IPR&D asset of $274.5 million included within intangible assets, net on the unaudited condensed consolidated balance sheet as of September 27, 2019.
The Company annually tests the indefinite-lived intangible assets for impairment, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable by either a qualitative or income approach. Management relies on a number of qualitative factors when considering a potential impairment such as changes to planned revenue or earnings that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
The gross carrying amount and accumulated amortization of intangible assets were comprised of the following at the end of the respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
December 28, 2018
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Amortizable:
|
|
|
|
|
|
|
|
|
Completed technology
|
$
|
10,456.9
|
|
|
$
|
3,621.0
|
|
|
$
|
10,467.9
|
|
|
$
|
2,980.6
|
|
|
License agreements
|
120.1
|
|
|
73.1
|
|
|
120.1
|
|
|
70.1
|
|
|
Trademarks
|
77.7
|
|
|
19.3
|
|
|
81.9
|
|
|
18.1
|
|
|
Customer relationships
|
—
|
|
|
—
|
|
|
27.5
|
|
|
14.1
|
|
|
Total
|
$
|
10,654.7
|
|
|
$
|
3,713.4
|
|
|
$
|
10,697.4
|
|
|
$
|
3,082.9
|
|
|
Non-Amortizable:
|
|
|
|
|
|
|
|
|
Trademarks
|
$
|
35.0
|
|
|
|
|
$
|
35.0
|
|
|
|
|
In-process research and development
|
519.8
|
|
|
|
|
633.3
|
|
|
|
|
Total
|
$
|
554.8
|
|
|
|
|
$
|
668.3
|
|
|
|
Ofirmev®
Since the Company's acquisition of Ofirmev in March 2014, the related completed technology intangible asset had been amortized using the straight-line method over a useful life of eight years. As the product nears loss of exclusivity, the Company believes it is better positioned to reliably determine the pattern in which the remaining economic benefits of the intangible asset are consumed. As a result, during the three months ended March 29, 2019, the Company concluded that the sum of the years digits method, an accelerated method of amortization, would more accurately reflect the consumption of the economic benefits over the remaining useful life of the asset. This change in amortization method resulted in additional amortization expense of $23.8 million and $89.5 million during the three and nine months ended September 27, 2019, respectively, which impacted basic earnings per share for the respective periods by $0.28 and $1.07 per share.
Intangible asset amortization expense
Intangible asset amortization expense was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27, 2019
|
|
September 28,
2018
|
|
September 27, 2019
|
|
September 28,
2018
|
|
Amortization expense
|
$
|
210.4
|
|
|
$
|
184.2
|
|
|
$
|
649.8
|
|
|
$
|
546.5
|
|
The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
|
|
|
|
|
|
|
|
Remainder of Fiscal 2019
|
$
|
203.6
|
|
|
Fiscal 2020
|
754.2
|
|
|
Fiscal 2021
|
657.6
|
|
|
Fiscal 2022
|
585.1
|
|
|
Fiscal 2023
|
581.1
|
|
Debt was comprised of the following at the end of the respective period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
December 28, 2018
|
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Principal
|
|
Unamortized Discount and Debt Issuance Costs
|
|
Current maturities of long-term debt:
|
|
|
|
|
|
|
|
|
4.875% Senior Notes due April 2020
|
$
|
698.0
|
|
|
$
|
1.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Term loan due September 2024
|
15.6
|
|
|
0.2
|
|
|
16.4
|
|
|
0.2
|
|
|
Term loan due February 2025
|
4.1
|
|
|
0.1
|
|
|
6.0
|
|
|
0.1
|
|
|
Other
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
Total current debt
|
717.7
|
|
|
1.6
|
|
|
22.7
|
|
|
0.3
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
4.875% Senior Notes due April 2020
|
—
|
|
|
—
|
|
|
700.0
|
|
|
3.2
|
|
|
Variable-rate receivable securitization due July 2020
|
—
|
|
|
—
|
|
|
250.0
|
|
|
0.4
|
|
|
9.50% debentures due May 2022
|
10.4
|
|
|
—
|
|
|
10.4
|
|
|
—
|
|
|
5.75% Senior Notes due August 2022
|
663.2
|
|
|
4.4
|
|
|
835.2
|
|
|
7.0
|
|
|
8.00% debentures due March 2023
|
4.4
|
|
|
—
|
|
|
4.4
|
|
|
—
|
|
|
4.75% Senior Notes due April 2023
|
350.1
|
|
|
2.0
|
|
|
500.2
|
|
|
3.5
|
|
|
5.625% Senior Notes due October 2023
|
659.4
|
|
|
6.0
|
|
|
731.4
|
|
|
8.0
|
|
|
Term loan due September 2024
|
1,509.1
|
|
|
16.4
|
|
|
1,597.4
|
|
|
19.8
|
|
|
Term loan due February 2025
|
400.5
|
|
|
6.4
|
|
|
591.0
|
|
|
10.7
|
|
|
5.50% Senior Notes due April 2025
|
596.1
|
|
|
5.9
|
|
|
692.1
|
|
|
7.7
|
|
|
Revolving credit facility
|
900.0
|
|
|
3.4
|
|
|
220.0
|
|
|
4.5
|
|
|
Other
|
—
|
|
|
—
|
|
|
1.9
|
|
|
—
|
|
|
Total long-term debt
|
5,093.2
|
|
|
44.5
|
|
|
6,134.0
|
|
|
64.8
|
|
|
Total debt
|
$
|
5,810.9
|
|
|
$
|
46.1
|
|
|
$
|
6,156.7
|
|
|
$
|
65.1
|
|
In July 2019, Mallinckrodt Securitization S.à r.l., a wholly owned special purpose subsidiary of the Company, repaid $200.0 million of outstanding obligations under the Amended and Restated Note Purchase Agreement, dated as of July 28, 2017 (as amended, the "Note Purchase Agreement"), among Mallinckrodt Securitization S.à r.l., the persons from time to time party thereto as purchasers, PNC Bank, National Association, as administrative agent, and Mallinckrodt LLC, a wholly owned subsidiary of the Company, as initial servicer (the "Servicer").
Upon payment in full of such outstanding obligations under the Note Purchase Agreement, the $250.0 million receivables securitization program was automatically terminated (including (i) the Note Purchase Agreement, (ii) the Amended and Restated Purchase and Sale Agreement, dated as of July 28, 2017 (as amended, the "Purchase and Sale Agreement"), among certain wholly owned subsidiaries of the Company, the Servicer, and Mallinckrodt Securitization S.à r.l., (iii) the Sale Agreements (together, the "Sale Agreements"), between Mallinckrodt LLC and certain subsidiaries of the Company and (iv) all agreements and documents entered into in connection therewith, and all security interests, liens or other rights securing the receivables securitization program were automatically released and terminated. Certain indemnification and other obligations in the Note Purchase Agreement, the Purchase and Sale Agreement, the Sale Agreements and the documents related thereto, which by their terms expressly survive termination of such documents, will survive the termination of Mallinckrodt Securitization S.à r.l.’s receivables securitization program.
As of September 27, 2019, the applicable interest rate and outstanding borrowings on the Company's variable-rate debt instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Applicable interest rate
|
|
Outstanding borrowings
|
|
Term loan due September 2024
|
5.08
|
%
|
|
$
|
1,524.7
|
|
|
Term loan due February 2025
|
5.18
|
%
|
|
404.6
|
|
|
Revolving credit facility
|
4.52
|
%
|
|
900.0
|
|
As of September 27, 2019, the Company was fully drawn on its $900.0 million revolving credit facility.
As of September 27, 2019, the Company continues to be in full compliance with the provisions and covenants associated with its debt agreements. The Company's debt instruments are further described within the notes to the financial statements included within the Company's Annual Report filed on Form 10-K for the fiscal year ended December 28, 2018.
|
|
|
|
|
|
13.
|
Accumulated Other Comprehensive Loss
|
The components of accumulated other comprehensive loss were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation
|
|
Unrecognized Loss on Derivatives
|
|
Unrecognized Gain (Loss) on Benefit Plans
|
|
Accumulated Other Comprehensive Loss
|
|
Balance as of December 28, 2018
|
$
|
(20.4
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
0.1
|
|
|
$
|
(24.3
|
)
|
|
Impact of accounting standard adoptions
|
—
|
|
|
—
|
|
|
0.5
|
|
|
0.5
|
|
|
Other comprehensive income before reclassifications
|
1.6
|
|
|
—
|
|
|
0.2
|
|
|
1.8
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
1.0
|
|
|
(1.1
|
)
|
|
(0.1
|
)
|
|
Net current period other comprehensive income (loss)
|
1.6
|
|
|
1.0
|
|
|
(0.9
|
)
|
|
1.7
|
|
|
Balance as of September 27, 2019
|
$
|
(18.8
|
)
|
|
$
|
(3.0
|
)
|
|
$
|
(0.3
|
)
|
|
$
|
(22.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency Translation
|
|
Unrecognized Loss on Derivatives
|
|
Unrecognized Loss on Benefit Plans
|
|
Accumulated Other Comprehensive Loss
|
|
Balance as of December 29, 2017
|
$
|
(8.2
|
)
|
|
$
|
(4.7
|
)
|
|
$
|
(1.5
|
)
|
|
$
|
(14.4
|
)
|
|
Other comprehensive (loss) income before reclassifications
|
(4.1
|
)
|
|
—
|
|
|
4.3
|
|
|
0.2
|
|
|
Amounts reclassified from accumulated other comprehensive loss
|
—
|
|
|
0.7
|
|
|
(5.2
|
)
|
|
(4.5
|
)
|
|
Net current period other comprehensive (loss) income
|
(4.1
|
)
|
|
0.7
|
|
|
(0.9
|
)
|
|
(4.3
|
)
|
|
Balance as of September 28, 2018
|
$
|
(12.3
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
(2.4
|
)
|
|
$
|
(18.7
|
)
|
The following summarizes reclassifications from accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
|
|
September 27,
2019
|
|
September 28,
2018
|
|
Line Item in the Unaudited Condensed Consolidated
Statement of Income
|
|
Amortization and other of unrealized loss on derivatives
|
$
|
1.0
|
|
|
$
|
0.7
|
|
|
Interest expense
|
|
Amortization of pension and post-retirement benefit plans:
|
|
|
|
|
|
|
Net actuarial loss
|
0.4
|
|
|
0.4
|
|
|
Other income, net
|
|
Prior service credit
|
(1.5
|
)
|
|
(1.5
|
)
|
|
Other income, net
|
|
Plan settlements
|
—
|
|
|
(4.1
|
)
|
|
Other income, net
|
|
Total reclassifications for the period
|
$
|
(0.1
|
)
|
|
$
|
(4.5
|
)
|
|
|
In disposing of assets or businesses, the Company has from time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that the ultimate resolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.
In connection with the sale of the Specialty Chemicals business (formerly known as Mallinckrodt Baker) in fiscal 2010, the Company agreed to indemnify the purchaser with respect to various matters, including certain environmental, health, safety, tax and other matters. The indemnification obligations relating to certain environmental, health and safety matters have a term of 17 years
from the sale, while some of the other indemnification obligations have an indefinite term. The amount of the liability relating to all of these indemnification obligations included in other liabilities on the Company's unaudited condensed consolidated balance sheets as of September 27, 2019 and December 28, 2018 was $15.1 million and $14.6 million, respectively, of which $12.3 million and $11.8 million, respectively, related to environmental, health and safety matters. The value of the environmental, health and safety indemnity was measured based on the probability-weighted present value of the costs expected to be incurred to address environmental, health and safety claims made under the indemnity. The aggregate fair value of these indemnification obligations did not differ significantly from their aggregate carrying value as of September 27, 2019 and December 28, 2018. As of September 27, 2019, the maximum future payments the Company could be required to make under these indemnification obligations were $70.2 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $18.9 million and $18.6 million remained in restricted cash, included in other long-term assets on the unaudited condensed consolidated balance sheets as of September 27, 2019 and December 28, 2018, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 15.
The Company is also liable for product performance; however, the Company believes, given the information currently available, that the ultimate resolution of any such claims will not have a material adverse effect on its financial condition, results of operations and cash flows.
As of September 27, 2019, the Company had various other letters of credit, guarantees and surety bonds totaling $35.6 million and restricted cash of $9.1 million held in segregated accounts collateralizing surety bonds for the Company's environmental liabilities.
|
|
|
|
|
|
15.
|
Commitments and Contingencies
|
The Company is subject to various legal proceedings and claims, including patent infringement claims, product liability matters, personal injury, environmental matters, employment disputes, contractual disputes and other commercial disputes, including those described below. The Company believes that these legal proceedings and claims likely will be resolved over an extended period of time. Although it is not feasible to predict the outcome of these matters, the Company believes, unless indicated below, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.
Governmental Proceedings
Opioid-Related Matters
Since 2017, multiple U.S. states, counties, other governmental persons or entities and private plaintiffs have filed lawsuits against certain entities of the Company, as well as various other manufacturers, distributors, pharmacies, pharmacy benefit managers, individual doctors and/or others, asserting claims relating to defendants’ alleged sales, marketing, distribution, reimbursement, prescribing, dispensing and/or other practices with respect to prescription opioid medications, including certain of the Company's products. As of November 5, 2019, the cases the Company is aware of include, but are not limited to, approximately 2,315 cases filed by counties, cities, Native American tribes and/or other government-related persons or entities; approximately 207 cases filed by hospitals, health systems, unions, health and welfare funds or other third-party payers; approximately 104 cases filed by individuals and 14 cases filed by the Attorneys General for New Mexico, Kentucky, Rhode Island, Georgia, Florida, Alaska, New York, Hawaii, Nevada, South Dakota, New Hampshire, Illinois, and Idaho, with Idaho being the only state Attorney General to file in federal as opposed to state court. As of November 5, 2019, the Mallinckrodt defendants in these cases consist of Mallinckrodt plc and the following subsidiaries of Mallinckrodt plc: Mallinckrodt Enterprises LLC, Mallinckrodt LLC, SpecGx LLC, Mallinckrodt Brand Pharmaceuticals Inc., Mallinckrodt Inc., MNK 2011 Inc., and Mallinckrodt Enterprises Holdings, Inc. On September 12, 2019, the Attorney General for Ohio filed a motion in the Common Pleas Court of Ross County, Ohio to amend its complaint to add certain entities of the Company, but the court has not yet ruled on that motion. Certain of the lawsuits have been filed as putative class actions.
Most pending federal lawsuits have been coordinated in a federal multi-district litigation (“MDL”) pending in the U.S. District Court for the Northern District of Ohio. The MDL court has issued a series of case management orders permitting motion practice addressing threshold legal issues in certain cases, allowing discovery, setting pre-trial deadlines and setting a trial date on October 21, 2019 for two cases originally filed in the Northern District of Ohio by Summit County and Cuyahoga County against opioid manufacturers, distributors, and pharmacies ("Track 1 Cases"). The counties claim that opioid manufacturers' marketing activities changed the medical standard of care for treating both chronic and acute pain, which led to increases in the sales of their prescription opioid products. They also allege that opioid manufacturers’ and distributors’ failure to maintain effective controls against diversion was a substantial cause of the opioid crisis. On September 30, 2019, the Company announced that Mallinckrodt plc, along with its
wholly owned subsidiaries Mallinckrodt LLC and SpecGx LLC, had executed a definitive settlement agreement and release with Cuyahoga and Summit Counties in Ohio. The settlement fully resolves the Track 1 cases against all named Mallinckrodt entities that were scheduled to go to trial in October 2019 in the MDL. Under the agreement, the Company paid $24.0 million in cash on October 1, 2019. In addition, the Company will provide $6.0 million in generic products, including addiction treatment products, and will also provide a $0.5 million payment in two years in recognition of the counties' time and expenses. Further in the event of a comprehensive resolution of government-related opioid claims, the Company has agreed that the two plaintiff counties will receive the value they would have received under such a resolution, less the payments described above. All named Mallinckrodt entities were dismissed with prejudice from the lawsuit. The value of the settlement should not be extrapolated to any other opioid-related cases or claims. On October 21, 2019, the MDL court issued a Stipulated Dismissal Order dismissing the claims against the remaining manufacturers and distributors pursuant to a settlement agreement, and severing the claims against the remaining pharmacy defendant to be heard in a subsequent trial. A hearing is scheduled for November 6, 2019 to discuss the next steps in the MDL, including potential remand of certain cases and which defendants will be included in subsequent trials.
Other lawsuits remain pending in various state courts. In some jurisdictions, such as California, Connecticut, Illinois, Massachusetts, New York, Pennsylvania, South Carolina, Texas and West Virginia, certain of the 224 state lawsuits have been coordinated for pre-trial proceedings before a single court within their respective state court systems. State cases are generally at the pleading and/or discovery stage.
The lawsuits assert a variety of claims, including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”) or similar state laws, violations of state Controlled Substances Acts or state False Claims Acts, product liability, consumer fraud, unfair or deceptive trade practices, false advertising, insurance fraud, unjust enrichment and other common law and statutory claims arising from defendants’ manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys’ fees and costs. The claims generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an alleged failure to take adequate steps to prevent diversion.
The Company will continue to vigorously defend itself against all of these lawsuits as detailed above and similar lawsuits that may be brought by others. As of the date of this report, the Company has been in discussions with certain plaintiffs in other pending opioid lawsuits and is likely to have further discussions and/or enter into additional discussions with other parties in connection with opioid lawsuits. Mallinckrodt may be required to pay material amounts and/or incur other material obligations as a result of any settlements that are entered into as a result of such discussions, but the Company is unable to predict outcomes or estimate a range of reasonably possible losses at this stage. Further, such matters or the resolution thereof, whether through judicial process or settlement or otherwise, may make it necessary or advisable for the Company and/or one or more of its subsidiaries to seek to restructure its or their obligations in a bankruptcy proceeding. The Company is exploring a wide array of such potential outcomes as part of its contingency planning, including the impact such actions could have on its business and operations. Should a bankruptcy occur, the Company would be subject to additional risks and uncertainties that could adversely affect the Company’s business prospects and ability to continue as a going concern.
In addition to the lawsuits described above, certain entities of the Company have received subpoenas and civil investigative demands ("CID(s)") for information concerning the sale, marketing and/or distribution of prescription opioid medications and the Company's suspicious order monitoring programs, including from the U.S. Department of Justice ("DOJ") and the Attorneys General for Missouri, New Hampshire, Kentucky, Washington, Alaska, South Carolina, Puerto Rico, New York, West Virginia, Indiana, the Divisions of Consumer Protection and Occupational and Professional Licensing of the Utah Department of Commerce, and the New York State Department of Financial Services. The Company has been contacted by the coalition of State Attorneys General investigating the role manufacturers and distributors may have had in contributing to the increased use of opioids in the U.S. On January 27, 2018, the Company received a grand jury subpoena from the U.S. Attorneys’ Office (“USAO”) for the Southern District of Florida for documents related to the distribution, marketing and sale of generic oxymorphone products. On April 17, 2019, the Company received a grand jury subpoena from the USAO for the Eastern District of New York ("EDNY") for documents related to the sales and marketing of controlled substances, the policies and procedures regarding controlled substances, and other related documents. On June 4, 2019, the Company received a rider from the USAO for EDNY requesting additional documents regarding the Company's anti-diversion program. The Company is responding or has responded to these subpoenas, CIDs and any informal requests for documents.
In August 2018, the Company received a letter from the leaders of the Energy and Commerce Committee in the U.S. House of Representatives requesting a range of documents relating to its marketing and distribution of opioids. The Company completed its response to this letter in December 2018. The Company is cooperating with the investigation.
The Attorneys General for Kentucky, Alaska, New York, and New Hampshire have subsequently filed lawsuits against the Company. Similar subpoenas and investigations may be brought by others or the foregoing matters may be expanded or result in litigation. Since these investigations and/or lawsuits are in early stages, the Company is unable to predict outcomes or estimate a range of reasonably possible losses.
New York State Opioid Stewardship Act. On October 24, 2018, the Company filed suit in the U.S. District Court for the Southern District of New York against the State of New York, asking the court to declare New York State’s Opioid Stewardship Act (“OSA”) unconstitutional and to enjoin its enforcement. On December 19, 2018, the court declared the OSA unconstitutional and granted the Company’s motion for preliminary injunctive relief. On January 17, 2019, the State of New York appealed the court’s decision. The Company intends to vigorously assert its position in this matter. In April 2019, the State of New York passed its 2020 budget, which amended the OSA so that if the OSA decision is reversed on appeal, the OSA would apply only to the sale or distribution of certain opioids in New York for 2017 and 2018 and, effective July 1, 2019, imposed an excise tax on certain opioids.
Other Matters
SEC Subpoena. In August 2019, the Company received a subpoena from the U.S. Securities and Exchange Commission (“SEC”) for documents related to the Company’s disclosure of its dispute with the U.S. Department of Health and Human Services ("HHS") and Centers for Medicare & Medicaid Services ("CMS" and together with HHS, the "Agency") concerning the base date average manufacturer price ("AMP") under the Medicaid Drug Rebate Program for Mallinckrodt’s Acthar® Gel (repository corticotropin injection) ("Acthar Gel"), which is now the subject of litigation between the Company and the Agency (see Medicaid Lawsuit below). The Company is cooperating with the SEC’s investigation.
Medicaid Lawsuit. In May 2019, the Company filed a lawsuit under the Administrative Procedure Act ("APA") in federal district court for the District of Columbia against the Agency. The dispute involves the base date AMP under the Medicaid Drug Rebate Program for Acthar Gel. A drug’s “base date AMP” is used to calculate the Medicaid rebate amount payable by the drug’s manufacturer to state Medicaid agencies when the drug is prescribed to Medicaid beneficiaries. At issue in the lawsuit is whether FDA’s 2010 approval of a new drug application for use of Acthar Gel in treating infantile spasms rendered Acthar Gel eligible for a new base date AMP, as indicated by CMS's written communications in 2012. In May 2019, CMS indicated that if the Company failed to revert to use of the original base date AMP in its calculation of Acthar Medicaid rebates, CMS would identify the Company as being out of compliance with its Medicaid Drug Rebate Program reporting requirements, among other potential actions, triggering certain negative consequences. As such, the Company filed a lawsuit alleging (i) that CMS has violated the Medicaid drug rebate statute, (ii) that CMS has violated its own regulations defining “single source drug,” (iii) that CMS has failed to adequately explain its change in position based on two letters that CMS sent Questcor Pharmaceuticals Inc. ("Questcor") in 2012 regarding the base date AMP for Acthar Gel, (iv) that CMS failed to give the Company fair notice of its latest position, and (v) that CMS should be prohibited from applying its new position retroactively. The court held a hearing regarding this matter on August 2, 2019 and the court took the matter under advisement. While the Company believes that its lawsuit has strong factual and legal bases, as of September 27, 2019, the potential for retroactive non-recurring charges could range from zero to approximately $600.0 million.
Florida Civil Investigative Demand. In February 2019, the Company received a CID from the U.S. Attorney’s Office for the Middle District of Florida for documents related to alleged payments to healthcare providers in Florida and whether those payments violated the Anti-Kickback Statute. The Company is cooperating with the investigation.
U.S. House Committee Investigation. In January 2019, the Company along with 11 other pharmaceutical companies, received a letter from the U.S. House Committee on Oversight and Reform requesting information relating to the Company's pricing strategy for Acthar Gel and related matters. The Company is cooperating with the Committee's investigation.
Boston Civil Investigative Demand. In January 2019, the Company received a CID from the U.S. Attorney’s Office for the District of Massachusetts for documents related to the Company’s participation in the Medicaid Drug Rebate Program. The Company is cooperating with the investigation.
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania pursuant to which the Antitrust Division of the DOJ is seeking documents regarding generic products and pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena and intends to cooperate fully in the investigation.
Boston Subpoena. In December 2016, the Company received a subpoena from the USAO for the District of Massachusetts for documents related to the Company’s provision of financial and other support to patients, including through charitable foundations, and related matters. The Company responded to these requests and continues to cooperate fully in the investigation.
Therakos® Subpoena. In March 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation of the U.S. promotion of Therakos’ drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for indications not approved by the FDA, including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos’ efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for the Eastern District of Pennsylvania sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company responded to these requests and continues to cooperate fully in the investigation.
MNK 2011 Inc. (formerly known as Mallinckrodt Inc.) v. U.S. Food and Drug Administration and United States of America. In November 2014, the FDA reclassified the Company's Methylphenidate ER in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("the Orange Book"). In November 2014, the Company filed a Complaint in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States (the "MD Complaint") for judicial review of the FDA’s reclassification. In July 2015, the court granted the FDA's motion to dismiss with respect to three of the five counts in the MD Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts (the “MD Order”). On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of the Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the U.S. Court of Appeals for the Fourth Circuit issued an order placing the Company’s appeal of the MD Order in abeyance pending the outcome of the withdrawal proceedings. The parties exchanged documents and in April 2018, the Company filed its submission in support of its position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that the Company's Methylphenidate ER products may lose their FDA approval and have to be withdrawn from the market.
Questcor Subpoena. In September 2012, Questcor received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to Acthar Gel. Questcor subsequently was informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC were participating in the investigation to review Questcor's promotional practices and related matters pertaining to Acthar Gel. The current investigation also relates to Questcor's provision of financial and other support to patients, including through charitable foundations and related matters. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to Acthar Gel. On or about March 8, 2019, the U.S. District Court for the Eastern District of Pennsylvania unsealed two qui tam actions involving the allegations under investigation by the USAO for the Eastern District of Pennsylvania. The DOJ intervened in both actions, which were later consolidated. In September 2019, the Company executed a settlement agreement with the DOJ for $15.4 million and finalized settlements with the three qui tam plaintiffs. These settlements were paid during the three months ended September 27, 2019 and resolve the portion of the investigation and litigation involving Questcor's promotional practices related to Acthar Gel.
On or about June 4, 2019, the DOJ filed its Complaint in Intervention in the litigation, alleging claims under the federal False Claim Act based on Questcor's relationship with and donations to an independent charitable patient co-pay foundation. The Company disagrees with the DOJ's characterization of the facts and applicable law. The Company intends to vigorously defend itself in this matter and on August 19, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Patent Litigation
Ofirmev Patent Litigation: Altan Pharma Ltd. In March 2019, Mallinckrodt Hospital Products Inc. and Mallinckrodt Hospital Products IP Limited, both subsidiaries of the Company, and New Pharmatop LP, the current owner of the U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against Altan Pharma Ltd. (“Altan”) alleging that Altan infringed U.S. Patent No. 6,992,218, U.S. Patent No. 9,399,012, U.S. Patent No. 9,610,265 and U.S. Patent No. 9,987,238 following receipt of a February 2019 notice from Altan concerning its submission of a new drug application, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. On August 29, 2019, the parties entered into a settlement agreement under which Altan was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its New Drug Application (NDA) on or after December 6, 2020, or earlier under certain circumstances.
Amitiza Patent Litigation: Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. In October 2018, Sucampo AG, Sucampo Pharmaceuticals, Inc. and Sucampo Pharma LLC, all subsidiaries of the Company, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively “Sun”) alleging that Sun infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,097,653, 8,338,639, 8,389,542, 8,748,481 and 8,779,187 following receipt of a September 2018 notice from Sun concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. The Company intends to vigorously enforce its intellectual property rights relating to Amitiza.
Inomax® Patent Litigation: Praxair Distribution, Inc. and Praxair, Inc. (collectively “Praxair”). In February 2015, INO Therapeutics LLC and Ikaria, Inc., both subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against Praxair following receipt of a January 2015 notice from Praxair concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a nitric oxide drug product delivery system. In July 2016, the Company filed a second suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning three additional patents recently added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system. The infringement claims in the second suit were added to the original suit. In September 2016, the Company filed a third suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice
concerning a fourth patent added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for its nitric oxide drug product delivery system.
Trial for the suit filed in February 2015 was held in March 2017 and a decision was rendered September 5, 2017 that ruled five patents invalid and six patents not infringed. The Company appealed the decision to the Court of Appeals for the Federal Circuit. The oral arguments in the appeal occurred on February 6, 2019. Praxair received FDA approval of their ANDA for their Noxivent nitric oxide and clearance of their 510(k) for their NOxBOXi device on October 2, 2018. The appeal decision, issued on August 27, 2019, substantively affirmed the District Court decision with respect to the invalidity of the heart failure (HF) patents and the non-infringement of the delivery system infrared (DSIR) patents. The Company filed a petition for en banc review at the Federal Circuit on September 26, 2019. As of the date of this report there has been limited commercial launch activity by Praxair. The Company intends to continue its efforts to vigorously enforce its intellectual property rights relating to Inomax in the Praxair litigation to prevent the marketing of infringing generic products prior to the expiration of the patents covering Inomax. An adverse final outcome in the appeal of the Praxair litigation decision (or a broad at-risk launch by Praxair prior to the final appellate decision) could result in the broader-scale launch of a competitive nitric oxide product before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity), which could adversely affect the Company's ability to successfully maximize the value of Inomax and have an adverse effect on its financial condition, results of operations and cash flows.
Commercial and Securities Litigation
Shareholder Derivative Litigation (Brandhorst). On September 19, 2019, a purported shareholder of the Company’s stock filed a shareholder derivative complaint in the United States District Court for the District of Columbia against the Company, as nominal defendant, as well as its Chief Executive Officer ("CEO") Mark Trudeau, its former Chief Financial Officer ("CFO") Matthew K. Harbaugh, its Executive Vice President Hugh O’Neill, and the following members of the Company’s Board of Directors: Angus Russell, David Carlucci, J. Martin Carroll, David Norton, JoAnn Reed and Kneeland Youngblood (collectively with Trudeau, Harbaugh and O’Neill, the “Individual Defendants”). The lawsuit is captioned Lynn Brandhorst, derivatively on behalf of nominal defendant Mallinckrodt PLC v. Mark Trudeau et al. and relies on the allegations from the putative class action securities litigation that was filed against the Company and certain of its officers on January 23, 2017, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. described further below. The complaint asserts claims for contribution, breaches of fiduciary duty, unjust enrichment, abuse of control, and gross mismanagement, and is premised on allegations that the Individual Defendants caused the Company to make the allegedly false or misleading statements at issue in the Shenk lawsuit. The complaint seeks damages in an unspecified amount and corporate governance reforms. The Company and the Individual Defendants intend to vigorously defend themselves in this matter.
Humana Litigation. On August 8, 2019, Humana Inc. filed a lawsuit against the Company in the U.S. District Court for the Central District of California alleging violations of federal and state antitrust laws; racketeering (“RICO”) violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(d); violations of state unfair competition, consumer fraud and deceptive trade practice laws; state insurance fraud; tortious interference with contract; and unjust enrichment related to the pricing of Acthar Gel. Humana alleges that it paid more than $700.0 million for Acthar Gel and seeks undisclosed damages from 2011 through present. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and includes references to allegations at issue in a pending qui tam action against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above) and is proceeding as Humana Inc. v. Mallinckrodt ARD LLC. Plaintiff filed an Amended Complaint on October 2, 2019. The Company intends to vigorously defend itself in this matter, and on October 28, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Putative Class Action Securities Litigation (Strougo). On July 26, 2019, a putative class action lawsuit was filed against the Company, its CEO Mark Trudeau, its CFO Bryan M. Reasons, its former Interim CFO George A. Kegler and its former CFO Matthew K. Harbaugh, in the U.S. District Court for the Southern District of New York, captioned Barbara Strougo v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt's securities between February 28, 2018 and July 16, 2019. The lawsuit generally alleges that the defendants made false and misleading statements in violation of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder related to the Company’s clinical study designed to assess the efficacy and safety of its Acthar Gel in patients with amyotrophic lateral sclerosis. The lawsuit seeks monetary damages in an unspecified amount. The Company intends to vigorously defend itself in this matter.
Putative Class Action Litigation - Plumbers & Pipefitters Local 322. On July 19, 2019, Pipefitters Local 322 filed a putative state class action lawsuit against the Company in the Superior Court of New Jersey, Camden County, proceeding as United Assoc. of Plumbers & Pipefitters Local 322 of Southern New Jersey v. Mallinckrodt ARD, LLC. The complaint made similar allegations as those alleged in related state and federal actions filed by the same plaintiff law firm filed in Illinois, Pennsylvania, Tennessee and Maryland, including references to allegations at issue in pending qui tam actions against the Company with the Eastern District of Pennsylvania. In particular, the complaint alleged violations of the New Jersey Consumer Fraud Act, the New Jersey Antitrust Act, violations of state RICO statutes, negligent misrepresentation, conspiracy and unjust enrichment associated with the commercialization of Acthar Gel. Plaintiff voluntarily dismissed the lawsuit on September 6, 2019.
Putative Class Action Litigation - Steamfitters Local Union No. 420. On July 12, 2019, Steamfitters Local Union No. 420 filed a putative class action lawsuit against the Company and United BioSource Corporation in the U.S. District Court for the Eastern District of Pennsylvania, proceeding as Steamfitters Local Union No. 420 v. Mallinckrodt ARD, LLC et al. The complaint makes similar allegations as those alleged in related state and federal actions that were filed by the same plaintiff's law firm in Illinois, Pennsylvania, Tennessee and Maryland, and includes references to allegations at issue in a pending qui tam actions against the Company in the U.S. District Court for the Eastern District of Pennsylvania (see Questcor Subpoena above). In particular, the complaint alleges RICO violations under 18 U.S.C. § 1962(c); conspiracy to violate RICO under 18 U.S.C. § 1962(c); violations of the Pennsylvania (and other states) Unfair Trade Practices and Consumer Protection laws; negligent misrepresentation; aiding and abetting/conspiracy; and unjust enrichment. The complaint also seeks declaratory and injunctive relief. The Company intends to vigorously defend itself in this matter, and on August 22, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Acument Global. On May 21, 2019, Acument Global Technologies, Inc., filed a non-class complaint against the Company and other defendants in Tennessee state court alleging violations of Tennessee Consumer Protection Laws, unjust enrichment, fraud and conspiracy to defraud. The case alleges similar facts as those alleged in the MSP and Rockford matters below, and is captioned Acument Global Technologies, Inc., v. Mallinckrodt ARD Inc., et al. The Company intends to vigorously defend itself in this matter, and on July 29, 2019, moved to dismiss the complaint. The Company's motion to dismiss remains pending.
Washington County Board of Education ("WCBE"). On May 21, 2019, WCBE filed a non-class complaint against the Company and other defendants in Maryland state court alleging violations of Maryland Consumer Protection Act, negligent misrepresentation, fraud, unjust enrichment and conspiracy to defraud. The case, which was removed to the U.S. District Court for the District of Maryland on June 24, 2019, alleges similar facts as those alleged in the MSP and Rockford matters below, and is captioned Washington County Board of Education v. Mallinckrodt ARD Inc., et al. The Company moved to dismiss the original complaint on July 1, 2019. Thereafter, Plaintiff filed an amended complaint, which the Company moved to dismiss on July 29, 2019. The Company's motion to dismiss the amended complaint remains pending. Plaintiff 's July 15, 2019 motion to remand the lawsuit to Maryland state court also remains pending.
Local 542. On May 25, 2018, the International Union of Operating Engineers Local 542 filed a non-class complaint against the Company and other defendants in Pennsylvania state court alleging improper pricing and distribution of Acthar Gel, in violation of Pennsylvania's Unfair Trade Practices and Consumer Protection Law, aiding and abetting, unjust enrichment and negligent misrepresentation. The case alleges similar facts as the MSP and Rockford matters below, and is captioned Int'l Union of Operating Engineers Local 542 v. Mallinckrodt ARD Inc., et al. Plaintiff filed an amended complaint on August 27, 2018, the Company's objections to which were denied by the court. The Company intends to continue to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Grifols. On March 13, 2018, Grifols initiated arbitration against the Company, alleging breach of a Manufacturing and Supply Agreement entered into between the Company's predecessor-in-interest, Cadence Pharmaceuticals Inc., and Grifols. The Company has entered into a settlement for this matter and has appropriate reserves recorded.
Putative Class Action Litigation (MSP). On October 30, 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Central District of California. Pursuant to a motion filed by the defendants, the case was transferred to the U.S. District Court for the Northern District of Illinois in January 2018, and is currently proceeding as MSP Recovery Claims, Series II, LLC, et al. v. Mallinckrodt ARD, Inc., et al. The Company filed a motion to dismiss on February 23, 2018, which was granted on January 25, 2019 with leave to amend. MSP filed the operative First Amended Class Action Complaint on April 10, 2019, in which it asserts claims under federal and state antitrust laws and state consumer protection laws. The complaint alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen® Depot ("Synacthen") and reaching anti-competitive agreements with the other defendants by selling Acthar Gel through an exclusive distribution network. The complaint purports to be brought on behalf of all third-party payers, or their assignees, in the U.S. and its territories, who have, as indirect purchasers, in whole or in part, paid for, provided reimbursement for, and/or possess the recovery rights to reimbursement for the indirect purchase of Acthar Gel from August 1, 2007 to present. The Company moved to dismiss the First Amended Class Action Complaint on May 24, 2019. The Company's motion to dismiss remains pending.
Employee Stock Purchase Plan ("ESPP") Securities Litigation. On July 20, 2017, a purported purchaser of Mallinckrodt stock through Mallinckrodt's ESPPs, filed a derivative lawsuit in the Federal District Court in the Eastern District of Missouri, captioned Solomon v. Mallinckrodt plc, et al., against the Company, its CEO Mark C. Trudeau, its former CFO Matthew K. Harbaugh, its Controller Kathleen A. Schaefer, and current and former directors of the Company. On September 6, 2017, plaintiff voluntarily dismissed its complaint in the Federal District Court for the Eastern District of Missouri and refiled virtually the same complaint in the U.S. District Court for the District of Columbia. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt stock between November 25, 2014, and January 18, 2017, through the ESPPs. In the alternative, the plaintiff alleges a class action for those same purchasers/acquirers of stock in the ESPPs during the same period. The complaint asserts claims under Section 11 of the Securities Act, and for breach of fiduciary duty, misrepresentation, non-disclosure, mismanagement of the ESPPs' assets and breach of contract arising from substantially similar allegations as those contained in the putative class action securities litigation described in the Shenk lawsuit below. Stipulated co-lead plaintiffs were approved by the court on March 1, 2018.
Co-lead Plaintiffs filed an amended complaint on June 4, 2018 having a class period of July 14, 2014 to November 6, 2017. On July 6, 2018, this matter was stayed by agreement of the parties pending resolution of the Shenk lawsuit below.
Putative Class Action Litigation (Rockford). On April 6, 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation in the U.S. District Court for the Northern District of Illinois. The case is captioned City of Rockford v. Mallinckrodt ARD, Inc., et al. The complaint was subsequently amended to, among other things, include an additional named plaintiff and additional defendants. As amended, the complaint purports to be brought on behalf of all self-funded entities in the U.S. and its Territories, excluding any Medicare Advantage Organizations, related entities and certain others, that paid for Acthar Gel from August 2007 to the present. Plaintiff alleges violations of federal antitrust and RICO laws, as well as various state law claims in connection with the distribution and sale of Acthar Gel. On January 22, 2018, the Company filed a motion to dismiss the Second Amended Complaint, which was granted in part on January 25, 2019, dismissing one of two named plaintiffs and all claims with the exception of Plaintiff's federal and state antitrust claims. The remaining allegation in the case is that the Company engaged in anti-competitive acts to artificially raise and maintain the price of Acthar Gel. To this end, Plaintiff alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen and conspired with the other named defendants by selling Acthar Gel through an exclusive distributor. The Company intends to continue to vigorously defend itself in this matter. At this stage, the Company is not able to reasonably estimate the expected amount or range of cost or any loss associated with this lawsuit.
Putative Class Action Securities Litigation (Shenk). On January 23, 2017, a putative class action lawsuit was filed against the Company and its CEO in the U.S. District Court for the District of Columbia, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased Mallinckrodt's publicly traded securities on a domestic exchange between November 25, 2014 and January 18, 2017. The lawsuit generally alleges that the Company made false or misleading statements related to Acthar Gel and Synacthen to artificially inflate the price of the Company's stock. In particular, the complaint alleges a failure by the Company to provide accurate disclosures concerning the long-term sustainability of Acthar Gel revenues, and the exposure of Acthar Gel to Medicare and Medicaid reimbursement rates. On January 26, 2017, a second putative class action lawsuit, captioned Jyotindra Patel v. Mallinckrodt plc, et al. was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Patel complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Shenk lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 13, 2017, a third putative class action lawsuit, captioned Amy T. Schwartz, et al., v. Mallinckrodt plc, et al., was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Schwartz complaint purports to be brought on behalf of shareholders who purchased shares of the Company between July 14, 2014 and January 18, 2017 and asserts claims similar to those set forth in the Shenk lawsuit. On March 23, 2017, a fourth putative class action lawsuit, captioned Fulton County Employees' Retirement System v. Mallinckrodt plc, et al., was filed against the Company, its CEO and former CFO in the U.S. District Court for the District of Columbia. The Fulton County complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Schwartz lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 27, 2017, four separate plaintiff groups moved to consolidate the pending cases and to be appointed as lead plaintiffs in the consolidated case. Since that time, two of the plaintiff groups have withdrawn their motions. Lead plaintiff was designated by the court on March 9, 2018. Lead plaintiff filed a consolidated complaint on May 18, 2018, alleging a class period from July 14, 2014 to November 6, 2017, the Company, its CEO, its former CFO, and Executive Vice President, Hugh O'Neill, as defendants, and containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for Acthar Gel. On August 30, 2018, the lead plaintiff voluntarily dismissed the claims against Mr. O'Neill without prejudice. The Company filed a motion to dismiss the complaint which was granted in part, and denied in part by the court on July 30, 2019. The Company intends to vigorously defend itself in this matter.
Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of September 27, 2019, it was probable that it would incur remediation costs in the range of $36.8 million to $77.6 million. The Company also concluded that, as of September 27, 2019, the best estimate within this range was $62.0 million, of which $1.7 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the unaudited condensed consolidated balance sheet as of September 27, 2019. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies ("Cooperating Parties Group" or "CPG") are parties to a May 2007 Administrative Order on Consent ("AOC") with the Environmental Protection Agency ("EPA") to perform a remedial investigation and feasibility study ("RI/FS") of the 17-mile stretch known as the Lower Passaic River ("the River") Study Area. The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey.
In April 2014, the EPA issued a revised Focused Feasibility Study ("FFS"), with remedial alternatives to address cleanup of the lower 8-mile stretch of the River. The EPA estimated the cost for the remediation alternatives ranged from $365.0 million to $3.2 billion and the EPA's preferred approach had an estimated cost of $1.7 billion.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA that included alternative remedial actions for the entire 17-mile stretch of the River.
On March 4, 2016, the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River with a slight modification on its preferred approach and a revised estimated cost of $1.38 billion. On October 5, 2016, the EPA announced that Occidental Chemicals Corporation ("OCC") had entered into an agreement to develop the remedial design.
On August 7, 2018, the EPA finalized a buyout offer of $280,600 with the Company, limited to its former Lodi facility, for the lower 8 miles of the River. During the three months ended September 28, 2018, the Company reduced the accrual associated with this matter by $11.8 million to $26.2 million, which represents the Company's estimate of its remaining liability related to the River.
Despite the issuance of the revised FFS and ROD by the EPA, the RI/FS by the CPG, and the cash out settlement by the EPA there are many uncertainties associated with the final agreed-upon remediation, potential future liabilities and the Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.
Occidental Chemical Corp. v. 21st Century Fox America, Inc. The Company and approximately 120 other companies were named as defendants in a lawsuit filed on June 30, 2018, by OCC, in which OCC seeks cost recovery and contribution for past and future costs in response to releases and threatened releases of hazardous substances into the lower 8 miles of the River. A former Mallinckrodt facility located in Jersey City, NJ (located in Newark Bay) and the former Belleville facility were named in the suit. Due to an indemnification agreement with AVON Inc., Mallinckrodt has tendered the liability for the Jersey City site to AVON Inc. and they have accepted. The Company retains a share of the liability for this suit related to the Belleville facility. A motion to dismiss several of the claims was denied by the court. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued will not have a material adverse effect on its financial condition, results of operations and cash flows.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. Between 1967 and 1982, International Minerals and Chemicals Corporation ("IMC"), a predecessor in interest to the Company, leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the CO Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the Department of Justice, the U.S. Department of the Interior and the EPA (together, "the Government Agencies") issued a special notice letter to General Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the CO Site, to compel General Dynamics to perform the RI/FS for the AUS Operable Unit. General Dynamics negotiated an AOC with the Government Agencies to conduct an extensive RI/FS at the CO Site under the direction of the U.S. Fish and Wildlife Service. General Dynamics asserted in August 2004 that the Company is jointly and severally liable, along with approximately eight other lessees and operators at the AUS Operable Unit, for costs associated with alleged contamination of soils and groundwater resulting from historic operations, and the parties have entered into a non-binding mediation process. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Products Liability Litigation
Beginning with lawsuits brought in July 1976, the Company is named as a defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of products containing asbestos. A limited number of the cases allege premises liability based on claims that individuals were exposed to asbestos while on the Company's property. Each case typically names dozens of corporate defendants in addition to the Company. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos. The Company's involvement in asbestos cases has been limited because it did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims have never been substantiated and have been dismissed by the courts. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims and intends to continue to defend these lawsuits. When appropriate, the Company settles claims; however, amounts paid to settle and defend all asbestos claims have been immaterial. As of September 27, 2019, there were approximately 11,700 asbestos-related cases pending against the Company.
The Company estimates pending asbestos claims, claims that were incurred but not reported and related insurance recoveries, which are recorded on a gross basis in the unaudited condensed consolidated balance sheets. The Company's estimate of its liability for pending and future claims is based on claims experience over the past five years and covers claims either currently filed or
expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes, given the information currently available, that the ultimate resolution of all known and anticipated future claims, after taking into account amounts already accrued, along with recoveries from insurance, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Interest-bearing Deferred Tax Obligation
As part of the integration of Questcor, the Company entered into an internal installment sale transaction related to certain Acthar Gel intangible assets during the three months ended December 26, 2014. The installment sale transaction resulted in a taxable gain. In accordance with Internal Revenue Code Section 453A ("Section 453A") the gain is considered taxable in the period in which installment payments are received. During the three months ended December 25, 2015, the Company entered into similar transactions with certain intangible assets acquired in the acquisitions of Ikaria, Inc. and Therakos, Inc.
During the three months ended March 29, 2019, the Company completed its reorganization of its intercompany financing and associated legal entity ownership. As a result, the Company had no remaining interest-bearing U.S. deferred tax liabilities as of September 27, 2019, compared to $227.5 million as of December 28, 2018. See Note 6 for further details regarding this reorganization. The GAAP calculation of interest associated with these deferred tax liabilities is subject to variable interest rates. The Company recognized interest expense associated with these deferred tax liabilities of $18.1 million during the nine months ended September 28, 2018.
The Company has reported Section 453A interest on its tax returns on the basis of its interpretation of the U.S. Internal Revenue Code and Regulations. Alternative interpretations of these provisions could result in additional interest payable on the deferred tax liability. Due to the inherent uncertainty in these interpretations, the Company has deferred the recognition of the benefit associated with the Company's interpretation and maintains a corresponding liability of $47.4 million and $56.0 million as of September 27, 2019 and December 28, 2018, respectively. The decrease of $8.6 million was recognized as a benefit to interest expense during the nine months ended September 27, 2019, due to a lapse of certain statute of limitations. Further favorable resolution of this uncertainty would likely result in a material reversal of this liability and a benefit being recorded to interest expense within the unaudited condensed consolidated statements of income.
Tax Matters
On August 5, 2019, the IRS proposed an adjustment to the taxable income of MHP as a result of its findings in the audit of MHP’s tax year ended September 26, 2014. MHP, formerly known as Cadence Pharmaceuticals, Inc. (“Cadence”), was acquired by the Company as a U.S. subsidiary on March 19, 2014. Following the acquisition of Cadence, the Company transferred certain rights and risks in Ofirmev intellectual property (“Transferred IP”) to a wholly owned non-U.S. subsidiary of the Company. The transfer occurred at a price (“Transfer Price”) determined in conjunction with the Company’s external advisors, in accordance with applicable Treasury Regulations and with reference to the $1,329.0 million taxable consideration paid by the Company to the shareholders of Cadence. The IRS asserts the value of the Transferred IP exceeds the value of the acquired Cadence shares and, further, partially disallows the Company’s control premium subtraction. The proposed adjustment to taxable income of $871.0 million, excluding potential associated interest and penalties, is proposed as a multi-year adjustment and may result in a non-cash reduction of the Company’s U.S. Federal net operating loss carryforward of $849.3 million. The Company strongly disagrees with the proposed increase to the Transfer Price and intends to contest it through all available administrative and judicial remedies, which may take a number of years to conclude. The final outcome cannot be reasonably quantified at this time, however, the proposed adjustment may be material. The Company believes its reserve for income tax contingencies is adequate.
Other Matters
The Company is a defendant in a number of other pending legal proceedings relating to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations and cash flows.
The Company's legal proceedings and claims are further described within the notes to the financial statements included within the Company's Annual Report filed on Form 10-K for the fiscal year ended December 28, 2018.
License Agreement
In July 2019, the Company entered into a license and collaboration agreement with Silence Therapeutics plc ("Silence") that will allow the companies to develop and commercialize ribonucleic acid interference ("RNAi") drug targets designed to inhibit the
complement cascade, a group of proteins that are involved in the immune system and that play a role in the development of inflammation.
During the three months ended September 27, 2019, the Company paid $20.0 million upfront with cash on hand, which was recorded within research and development ("R&D") expense, and gained an exclusive worldwide license to Silence's C3 complement asset, SLN500, with options to license up to two additional complement-targeted assets in Silence's preclinical complement-directed RNAi development program. The agreement also includes additional payments to Silence of up to $10.0 million in research milestones for SLN500, in addition to funding for Phase 1 clinical development including good manufacturing practices (GMP). Silence will be responsible for preclinical activities, and for executing the development program of SLN500 until the end of Phase 1, after which the Company will assume clinical development and responsibility for global commercialization. If approved, Silence could receive up to $563.0 million in commercial milestone payments and tiered low double-digit to high-teen royalties on net sales for SLN500.
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16.
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Financial Instruments and Fair Value Measurements
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Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:
Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2— significant other observable inputs that are observable either directly or indirectly; and
Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.
The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at the end of each period:
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|
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September 27,
2019
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|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
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|
Significant Other Observable Inputs
(Level 2)
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|
Significant Unobservable Inputs
(Level 3)
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|
Assets:
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|
|
|
|
|
|
|
|
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Debt and equity securities held in rabbi trusts
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$
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35.7
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|
|
$
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25.9
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|
|
$
|
9.8
|
|
|
$
|
—
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Equity securities
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11.4
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|
|
11.4
|
|
|
—
|
|
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—
|
|
|
|
$
|
47.1
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|
|
$
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37.3
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|
|
$
|
9.8
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|
|
$
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—
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|
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Liabilities:
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Deferred compensation liabilities
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$
|
37.3
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|
|
$
|
—
|
|
|
$
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37.3
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|
|
$
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—
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Contingent consideration and acquired contingent liabilities
|
105.4
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|
|
—
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|
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—
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|
|
105.4
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|
|
|
$
|
142.7
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|
|
$
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—
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|
|
$
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37.3
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|
|
$
|
105.4
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December 28,
2018
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
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|
Significant Unobservable Inputs
(Level 3)
|
|
Assets:
|
|
|
|
|
|
|
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|
Debt and equity securities held in rabbi trusts
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$
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33.1
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|
|
$
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22.4
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|
$
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10.7
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$
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—
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Liabilities:
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Deferred compensation liabilities
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$
|
38.5
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$
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—
|
|
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$
|
38.5
|
|
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$
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—
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|
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Contingent consideration and acquired contingent liabilities
|
151.4
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|
|
—
|
|
|
—
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|
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151.4
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|
|
|
$
|
189.9
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|
|
$
|
—
|
|
|
$
|
38.5
|
|
|
$
|
151.4
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Debt and equity securities held in rabbi trusts. Debt securities held in rabbi trusts primarily consist of U.S. government and agency securities and corporate bonds. When quoted prices are available in an active market, the investments are classified as level 1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in rabbi trusts primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.
Equity securities. Equity securities consist of shares in Silence, for which quoted prices are available in an active market; therefore, the investment is classified as level 1 and is valued based on quoted market prices reported on an internationally recognized securities exchange.
In July 2019, the Company remitted $5.0 million of consideration to Silence in exchange for equity shares. As part of this equity investment, the Company took a non-executive Director seat on the Silence Board of Directors. The Company's investment in Silence qualifies for equity method accounting given its ability to exercise significant influence; however, the Company elected the fair value method to account for its investment in Silence.
Deferred compensation liabilities. The Company maintains a non-qualified deferred compensation plan in the U.S., which permits eligible employees of the Company to defer a portion of their compensation. A recordkeeping account is set up for each participant and the participant chooses from a variety of funds for the deemed investment of their accounts. The recordkeeping accounts generally correspond to the funds offered in the Company's U.S. tax-qualified defined contribution retirement plan and the account balance fluctuates with the investment returns on those funds.
Contingent consideration and acquired contingent liabilities. The Company maintains various contingent consideration and acquired contingent liabilities associated with the acquisitions of Questcor, Stratatech Corporation ("Stratatech"), and Ocera Therapeutics, Inc. ("Ocera").
The contingent liability associated with the acquisition of Questcor pertains to the Company's license agreement with Novartis AG and Novartis Pharma AG (collectively "Novartis") related to Synacthen, otherwise known as the Company's development product MNK-1411. Under the terms of this agreement, the Company paid the required annual payment of $25.0 million during the nine months ended September 27, 2019. The fair value of the remaining contingent payments was measured based on the net present value of a probability-weighted assessment. As of September 27, 2019, the total remaining payments under the license agreement shall not exceed $90.0 million. The Company determined the fair value of the contingent consideration associated with the acquisition of Questcor to be $53.7 million and $76.2 million as of September 27, 2019 and December 28, 2018, respectively.
As part of the Stratatech acquisition, the Company provided contingent consideration to the prior shareholders of Stratatech, primarily in the form of regulatory filing and approval milestones associated with the deep partial thickness and full thickness indications associated with StrataGraft®. The Company assesses the likelihood and timing of making such payments. The fair value of the contingent payments was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the contingent consideration associated with the Stratatech acquisition to be $35.1 million and $53.7 million as of September 27, 2019 and December 28, 2018, respectively.
As part of the Ocera acquisition, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones for intravenous ("IV") and oral formulations of MNK-6105 and MNK-6106, which represent the IV and oral formulations, respectively, and sales-based milestones associated with MNK-6105 and MNK-6106. The Company determined the fair value of the contingent consideration based on an option pricing model to be $16.6 million and $21.5 million as of September 27, 2019 and December 28, 2018, respectively.
Of the total fair value of the contingent consideration of $105.4 million, $48.2 million was classified as current and $57.2 million was classified as non-current in the unaudited condensed consolidated balance sheet as of September 27, 2019. The following table summarizes the activity for contingent consideration:
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|
|
|
|
|
|
|
Balance as of December 28, 2018
|
$
|
151.4
|
|
|
Payments
|
(25.0
|
)
|
|
Accretion expense
|
2.5
|
|
|
Fair value adjustments
|
(23.5
|
)
|
|
Balance as of September 27, 2019
|
$
|
105.4
|
|
Financial Instruments Not Measured at Fair Value
The following methods and assumptions were used by the Company in estimating fair values for financial instruments not measured at fair value as of September 27, 2019 and December 28, 2018:
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•
|
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $28.0 million and $18.6 million as of September 27, 2019 and December 28, 2018, (level 1), respectively, which was included in other assets on the unaudited condensed consolidated balance sheets.
|
|
|
|
|
•
|
The Company received a portion of consideration as part of contingent earn-out payments related to the sale of the Nuclear Imaging business in the form of preferred equity certificates during both the nine months ended September 27, 2019 and September 28, 2018. These securities are classified as held-to-maturity and are carried at amortized cost, which approximates fair value (level 3), of $18.9 million and $9.0 million as of September 27, 2019 and December 28, 2018, respectively. These securities are included in other assets on the unaudited condensed consolidated balance sheets.
|
|
|
|
|
•
|
The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $66.8 million and $66.4 million as of September 27, 2019 and December 28, 2018, respectively. These contracts are included in other assets on the unaudited condensed consolidated balance sheets.
|
|
|
|
|
•
|
The carrying value of the Company's revolving credit facility approximates fair value due to the short-term nature of this instrument, and is therefore classified as level 1. The Company's 4.875%, 5.75%, 4.75%, 5.625% and 5.50% Senior Notes are classified as level 1, as quoted prices are available in an active market for these notes. Since the quoted market prices for the Company's term loans and 9.50% and 8.00% debentures are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value. The following table presents the carrying values and estimated fair values of the Company's debt as of the end of each period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 27, 2019
|
|
December 28, 2018
|
|
|
Carrying
Value
|
|
Fair
Value
|
|
Carrying
Value
|
|
Fair
Value
|
|
Level 1:
|
|
|
|
|
|
|
|
|
4.875% Senior Notes due April 2020
|
$
|
698.0
|
|
|
$
|
457.9
|
|
|
$
|
700.0
|
|
|
$
|
676.6
|
|
|
Variable-rate receivable securitization due July 2020
|
—
|
|
|
—
|
|
|
250.0
|
|
|
250.0
|
|
|
5.75% Senior Notes due August 2022
|
663.2
|
|
|
250.3
|
|
|
835.2
|
|
|
713.6
|
|
|
4.75% Senior Notes due April 2023
|
350.1
|
|
|
99.8
|
|
|
500.2
|
|
|
336.7
|
|
|
5.625% Senior Notes due October 2023
|
659.4
|
|
|
217.9
|
|
|
731.4
|
|
|
557.0
|
|
|
5.50% Senior Notes due April 2025
|
596.1
|
|
|
179.2
|
|
|
692.1
|
|
|
479.1
|
|
|
Revolving credit facility
|
900.0
|
|
|
900.0
|
|
|
220.0
|
|
|
220.0
|
|
|
Level 2:
|
|
|
|
|
|
|
|
|
9.50% debentures due May 2022
|
10.4
|
|
|
5.1
|
|
|
10.4
|
|
|
9.7
|
|
|
8.00% debentures due March 2023
|
4.4
|
|
|
1.6
|
|
|
4.4
|
|
|
3.8
|
|
|
Term loan due September 2024
|
1,524.7
|
|
|
1,136.9
|
|
|
1,613.8
|
|
|
1,472.4
|
|
|
Term loan due February 2025
|
404.6
|
|
|
300.9
|
|
|
597.0
|
|
|
548.0
|
|
|
Level 3:
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
—
|
|
|
2.2
|
|
|
2.2
|
|
|
Total debt
|
$
|
5,810.9
|
|
|
$
|
3,549.6
|
|
|
$
|
6,156.7
|
|
|
$
|
5,269.1
|
|
Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company generally does not require collateral from customers. A portion of the Company's accounts receivable outside the U.S. includes sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.
The following table shows net sales attributable to distributors that accounted for 10.0% or more of the Company's total net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
September 28,
2018
|
|
September 27,
2019
|
|
September 28,
2018
|
|
CuraScript, Inc.
|
31.1
|
%
|
|
35.9
|
%
|
|
30.2
|
%
|
|
35.7
|
%
|
|
AmerisourceBergen Corporation
|
*
|
|
|
12.3
|
%
|
|
*
|
|
|
*
|
|
*Net sales to this distributor were less than 10% of total net sales during the respective periods presented above.
The following table shows accounts receivable attributable to distributors that accounted for 10.0% or more of the Company's gross accounts receivable at the end of each period:
|
|
|
|
|
|
|
|
|
|
|
September 27,
2019
|
|
December 28,
2018
|
|
AmerisourceBergen Corporation
|
27.6
|
%
|
|
25.7
|
%
|
|
McKesson Corporation
|
14.1
|
%
|
|
21.9
|
%
|
|
CuraScript, Inc.
|
10.3
|
%
|
|
13.1
|
%
|
The following table shows net sales attributable to products that accounted for 10.0% or more of the Company's total net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
September 28,
2018
|
|
September 27,
2019
|
|
September 28,
2018
|
|
Acthar Gel
|
30.9
|
%
|
|
36.3
|
%
|
|
30.5
|
%
|
|
34.7
|
%
|
|
Inomax
|
18.4
|
%
|
|
16.7
|
%
|
|
18.1
|
%
|
|
17.0
|
%
|
|
Ofirmev
|
11.6
|
%
|
|
10.9
|
%
|
|
11.5
|
%
|
|
10.7
|
%
|
The Company operates in two reportable segments, which are further described below:
|
|
|
|
•
|
Specialty Brands includes innovative specialty pharmaceutical brands (inclusive of Amitiza); and
|
|
|
|
|
•
|
Specialty Generics includes niche specialty generic drugs and APIs.
|
All prior period segment information has been reclassified to reflect the realignment of the Company's reportable segments on a comparable basis, as previously mentioned in Note 1.
Selected information by reportable segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
September 28,
2018
|
|
September 27,
2019
|
|
September 28,
2018
|
|
Net sales:
|
|
|
|
|
|
|
|
|
Specialty Brands
|
$
|
580.4
|
|
|
$
|
640.0
|
|
|
$
|
1,812.4
|
|
|
$
|
1,844.3
|
|
|
Specialty Generics
|
163.3
|
|
|
159.9
|
|
|
545.2
|
|
|
536.4
|
|
|
Net sales
|
$
|
743.7
|
|
|
$
|
799.9
|
|
|
$
|
2,357.6
|
|
|
$
|
2,380.7
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Specialty Brands
|
$
|
267.3
|
|
|
$
|
288.0
|
|
|
$
|
864.2
|
|
|
$
|
794.4
|
|
|
Specialty Generics
|
21.8
|
|
|
16.5
|
|
|
80.1
|
|
|
94.7
|
|
|
Segment operating income
|
289.1
|
|
|
304.5
|
|
|
944.3
|
|
|
889.1
|
|
|
Unallocated amounts:
|
|
|
|
|
|
|
|
|
Corporate and unallocated expenses (1)
|
(23.4
|
)
|
|
(29.2
|
)
|
|
(105.6
|
)
|
|
(85.7
|
)
|
|
Intangible asset amortization
|
(210.4
|
)
|
|
(184.2
|
)
|
|
(649.8
|
)
|
|
(546.5
|
)
|
|
Restructuring and related charges, net
|
(7.2
|
)
|
|
(19.6
|
)
|
|
(11.2
|
)
|
|
(106.6
|
)
|
|
Non-restructuring impairment charges
|
—
|
|
|
(2.0
|
)
|
|
(113.5
|
)
|
|
(2.0
|
)
|
|
Separation costs (2)
|
(19.8
|
)
|
|
—
|
|
|
(50.4
|
)
|
|
—
|
|
|
R&D upfront payment (3)
|
(20.0
|
)
|
|
—
|
|
|
(20.0
|
)
|
|
—
|
|
|
Operating income (loss) (4)
|
$
|
8.3
|
|
|
$
|
69.5
|
|
|
$
|
(6.2
|
)
|
|
$
|
148.3
|
|
|
|
|
|
(1)
|
Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments.
|
|
|
|
|
(2)
|
Represents costs incurred related to the separation of the Company's Specialty Generics segment, inclusive of costs related to the suspended spin-off of that business and rebranding costs associated with the Specialty Brands ongoing transformation, all of which are included in SG&A.
|
|
|
|
|
(3)
|
Represents R&D expense incurred related to an upfront payment made to Silence in connection with the license and collaboration agreement entered into in July 2019. Refer to Note 15 for further details.
|
|
|
|
|
(4)
|
The amount of operating loss included in the Company's unaudited condensed consolidated statement of income for the three and nine months ended September 28, 2018 related to the Sucampo Acquisition was $32.2 million and $99.9 million, respectively. Included within these results were $18.0 million and $45.0 million of amortization associated with intangibles recognized from this acquisition and $31.0 million and $77.5 million of expense associated with fair value adjustments of acquired inventory for the three and nine months ended September 28, 2018, respectively.
|
Net sales by product family within the Company's reportable segments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
September 27,
2019
|
|
September 28,
2018
|
|
September 27,
2019
|
|
September 28,
2018
|
|
Acthar Gel
|
$
|
229.8
|
|
|
$
|
290.1
|
|
|
$
|
720.1
|
|
|
$
|
827.1
|
|
|
Inomax
|
136.8
|
|
|
133.2
|
|
|
427.6
|
|
|
404.0
|
|
|
Ofirmev
|
86.1
|
|
|
87.1
|
|
|
272.2
|
|
|
254.7
|
|
|
Therakos
|
60.9
|
|
|
60.0
|
|
|
183.6
|
|
|
174.2
|
|
|
Amitiza (1)
|
52.6
|
|
|
48.2
|
|
|
157.6
|
|
|
119.2
|
|
|
BioVectra
|
10.5
|
|
|
13.9
|
|
|
36.8
|
|
|
35.7
|
|
|
Other
|
3.7
|
|
|
7.5
|
|
|
14.5
|
|
|
29.4
|
|
|
Specialty Brands
|
580.4
|
|
|
640.0
|
|
|
1,812.4
|
|
|
1,844.3
|
|
|
|
|
|
|
|
|
|
|
|
Hydrocodone (API) and hydrocodone-containing tablets
|
15.7
|
|
|
15.5
|
|
|
51.2
|
|
|
46.3
|
|
|
Oxycodone (API) and oxycodone-containing tablets
|
17.2
|
|
|
13.6
|
|
|
53.3
|
|
|
43.3
|
|
|
Acetaminophen (API)
|
48.5
|
|
|
47.9
|
|
|
143.1
|
|
|
149.0
|
|
|
Other controlled substances
|
72.9
|
|
|
69.5
|
|
|
265.7
|
|
|
258.0
|
|
|
Other
|
9.0
|
|
|
13.4
|
|
|
31.9
|
|
|
39.8
|
|
|
Specialty Generics
|
163.3
|
|
|
159.9
|
|
|
545.2
|
|
|
536.4
|
|
|
Net sales
|
$
|
743.7
|
|
|
$
|
799.9
|
|
|
$
|
2,357.6
|
|
|
$
|
2,380.7
|
|
|
|
|
|
(1)
|
Amitiza consists of both product net sales and royalties. Refer to Note 3 for further details on Amitiza's revenues.
|
|
|
|
|
|
|
18.
|
Condensed Consolidating Financial Statements
|
Mallinckrodt International Finance S.A. ("MIFSA"), an indirectly 100%-owned subsidiary of Mallinckrodt plc established to own, directly or indirectly, substantially all of the operating subsidiaries of the Company, to issue debt securities and to perform treasury operations.
MIFSA is the borrower under the 4.75% Senior Notes due April 2023 ("the 2013 Notes"), which are fully and unconditionally guaranteed by Mallinckrodt plc. The following information provides the composition of the Company's comprehensive income, assets, liabilities, equity and cash flows by relevant group within the Company: Mallinckrodt plc as guarantor of the 2013 Notes, MIFSA as issuer of the 2013 Notes and the operating companies that represent assets of MIFSA. There are no subsidiary guarantees related to the 2013 Notes.
Set forth below are the condensed consolidating financial statements for the three and nine months ended September 27, 2019 and September 28, 2018, and as of September 27, 2019 and December 28, 2018. Eliminations represent adjustments to eliminate investments in subsidiaries and intercompany balances and transactions between or among Mallinckrodt plc, MIFSA and other subsidiaries. Condensed consolidating financial information for Mallinckrodt plc and MIFSA, on a standalone basis, has been presented using the equity method of accounting for subsidiaries.
MALLINCKRODT PLC
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 27, 2019
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
0.7
|
|
|
$
|
64.5
|
|
|
$
|
433.6
|
|
|
$
|
—
|
|
|
$
|
498.8
|
|
|
Accounts receivable, net
|
—
|
|
|
—
|
|
|
538.8
|
|
|
—
|
|
|
538.8
|
|
|
Inventories
|
—
|
|
|
—
|
|
|
325.5
|
|
|
—
|
|
|
325.5
|
|
|
Prepaid expenses and other current assets
|
11.8
|
|
|
0.2
|
|
|
110.2
|
|
|
—
|
|
|
122.2
|
|
|
Assets held for sale
|
—
|
|
|
—
|
|
|
175.9
|
|
|
—
|
|
|
175.9
|
|
|
Intercompany receivables
|
128.2
|
|
|
29.2
|
|
|
5,980.2
|
|
|
(6,137.6
|
)
|
|
—
|
|
|
Total current assets
|
140.7
|
|
|
93.9
|
|
|
7,564.2
|
|
|
(6,137.6
|
)
|
|
1,661.2
|
|
|
Property, plant and equipment, net
|
—
|
|
|
—
|
|
|
894.7
|
|
|
—
|
|
|
894.7
|
|
|
Intangible assets, net
|
—
|
|
|
—
|
|
|
7,496.1
|
|
|
—
|
|
|
7,496.1
|
|
|
Investment in subsidiaries
|
2,684.4
|
|
|
15,633.9
|
|
|
3,877.0
|
|
|
(22,195.3
|
)
|
|
—
|
|
|
Intercompany loans receivable
|
447.9
|
|
|
—
|
|
|
2,709.8
|
|
|
(3,157.7
|
)
|
|
—
|
|
|
Other assets
|
—
|
|
|
—
|
|
|
304.1
|
|
|
—
|
|
|
304.1
|
|
|
Total Assets
|
$
|
3,273.0
|
|
|
$
|
15,727.8
|
|
|
$
|
22,845.9
|
|
|
$
|
(31,490.6
|
)
|
|
$
|
10,356.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
—
|
|
|
$
|
696.7
|
|
|
$
|
19.4
|
|
|
$
|
—
|
|
|
$
|
716.1
|
|
|
Accounts payable
|
0.1
|
|
|
—
|
|
|
100.8
|
|
|
—
|
|
|
100.9
|
|
|
Accrued payroll and payroll-related costs
|
—
|
|
|
—
|
|
|
83.7
|
|
|
—
|
|
|
83.7
|
|
|
Accrued interest
|
—
|
|
|
8.1
|
|
|
82.8
|
|
|
—
|
|
|
90.9
|
|
|
Accrued and other current liabilities
|
0.8
|
|
|
0.2
|
|
|
505.5
|
|
|
—
|
|
|
506.5
|
|
|
Liabilities held for sale
|
—
|
|
|
—
|
|
|
55.8
|
|
|
—
|
|
|
55.8
|
|
|
Intercompany payables
|
191.7
|
|
|
5,732.8
|
|
|
213.1
|
|
|
(6,137.6
|
)
|
|
—
|
|
|
Total current liabilities
|
192.6
|
|
|
6,437.8
|
|
|
1,061.1
|
|
|
(6,137.6
|
)
|
|
1,553.9
|
|
|
Long-term debt
|
—
|
|
|
2,250.5
|
|
|
2,798.2
|
|
|
—
|
|
|
5,048.7
|
|
|
Pension and postretirement benefits
|
—
|
|
|
—
|
|
|
58.6
|
|
|
—
|
|
|
58.6
|
|
|
Environmental liabilities
|
—
|
|
|
—
|
|
|
60.3
|
|
|
—
|
|
|
60.3
|
|
|
Deferred income taxes
|
—
|
|
|
—
|
|
|
22.0
|
|
|
—
|
|
|
22.0
|
|
|
Other income tax liabilities
|
—
|
|
|
—
|
|
|
253.5
|
|
|
—
|
|
|
253.5
|
|
|
Intercompany loans payable
|
—
|
|
|
3,157.7
|
|
|
—
|
|
|
(3,157.7
|
)
|
|
—
|
|
|
Other liabilities
|
—
|
|
|
4.8
|
|
|
273.9
|
|
|
—
|
|
|
278.7
|
|
|
Total Liabilities
|
192.6
|
|
|
11,850.8
|
|
|
4,527.6
|
|
|
(9,295.3
|
)
|
|
7,275.7
|
|
|
Shareholders' Equity
|
3,080.4
|
|
|
3,877.0
|
|
|
18,318.3
|
|
|
(22,195.3
|
)
|
|
3,080.4
|
|
|
Total Liabilities and Shareholders' Equity
|
$
|
3,273.0
|
|
|
$
|
15,727.8
|
|
|
$
|
22,845.9
|
|
|
$
|
(31,490.6
|
)
|
|
$
|
10,356.1
|
|
MALLINCKRODT PLC
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 28, 2018
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
0.4
|
|
|
$
|
140.8
|
|
|
$
|
207.7
|
|
|
$
|
—
|
|
|
$
|
348.9
|
|
|
Accounts receivable, net
|
—
|
|
|
—
|
|
|
623.3
|
|
|
—
|
|
|
623.3
|
|
|
Inventories
|
—
|
|
|
—
|
|
|
322.3
|
|
|
—
|
|
|
322.3
|
|
|
Prepaid expenses and other current assets
|
3.9
|
|
|
0.2
|
|
|
128.6
|
|
|
—
|
|
|
132.7
|
|
|
Intercompany receivables
|
131.1
|
|
|
29.2
|
|
|
1,087.9
|
|
|
(1,248.2
|
)
|
|
—
|
|
|
Total current assets
|
135.4
|
|
|
170.2
|
|
|
2,369.8
|
|
|
(1,248.2
|
)
|
|
1,427.2
|
|
|
Property, plant and equipment, net
|
—
|
|
|
—
|
|
|
982.0
|
|
|
—
|
|
|
982.0
|
|
|
Intangible assets, net
|
—
|
|
|
—
|
|
|
8,282.8
|
|
|
—
|
|
|
8,282.8
|
|
|
Investment in subsidiaries
|
2,481.6
|
|
|
25,506.1
|
|
|
8,362.1
|
|
|
(36,349.8
|
)
|
|
—
|
|
|
Intercompany loans receivable
|
497.7
|
|
|
—
|
|
|
12,343.0
|
|
|
(12,840.7
|
)
|
|
—
|
|
|
Other assets
|
—
|
|
|
—
|
|
|
185.3
|
|
|
—
|
|
|
185.3
|
|
|
Total Assets
|
$
|
3,114.7
|
|
|
$
|
25,676.3
|
|
|
$
|
32,525.0
|
|
|
$
|
(50,438.7
|
)
|
|
$
|
10,877.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt
|
$
|
—
|
|
|
$
|
22.1
|
|
|
$
|
0.3
|
|
|
$
|
—
|
|
|
$
|
22.4
|
|
|
Accounts payable
|
0.1
|
|
|
—
|
|
|
147.4
|
|
|
—
|
|
|
147.5
|
|
|
Accrued payroll and payroll-related costs
|
—
|
|
|
—
|
|
|
124.0
|
|
|
—
|
|
|
124.0
|
|
|
Accrued interest
|
—
|
|
|
48.7
|
|
|
28.9
|
|
|
—
|
|
|
77.6
|
|
|
Accrued and other current liabilities
|
0.6
|
|
|
0.4
|
|
|
571.2
|
|
|
—
|
|
|
572.2
|
|
|
Intercompany payables
|
226.7
|
|
|
827.8
|
|
|
193.7
|
|
|
(1,248.2
|
)
|
|
—
|
|
|
Total current liabilities
|
227.4
|
|
|
899.0
|
|
|
1,065.5
|
|
|
(1,248.2
|
)
|
|
943.7
|
|
|
Long-term debt
|
—
|
|
|
3,566.9
|
|
|
2,502.3
|
|
|
—
|
|
|
6,069.2
|
|
|
Pension and postretirement benefits
|
—
|
|
|
—
|
|
|
60.5
|
|
|
—
|
|
|
60.5
|
|
|
Environmental liabilities
|
—
|
|
|
—
|
|
|
59.7
|
|
|
—
|
|
|
59.7
|
|
|
Deferred income taxes
|
—
|
|
|
—
|
|
|
324.3
|
|
|
—
|
|
|
324.3
|
|
|
Other income tax liabilities
|
—
|
|
|
—
|
|
|
228.0
|
|
|
—
|
|
|
228.0
|
|
|
Intercompany loans payable
|
—
|
|
|
12,840.7
|
|
|
—
|
|
|
(12,840.7
|
)
|
|
—
|
|
|
Other liabilities
|
—
|
|
|
7.6
|
|
|
297.0
|
|
|
—
|
|
|
304.6
|
|
|
Total Liabilities
|
227.4
|
|
|
17,314.2
|
|
|
4,537.3
|
|
|
(14,088.9
|
)
|
|
7,990.0
|
|
|
Shareholders' Equity
|
2,887.3
|
|
|
8,362.1
|
|
|
27,987.7
|
|
|
(36,349.8
|
)
|
|
2,887.3
|
|
|
Total Liabilities and Shareholders' Equity
|
$
|
3,114.7
|
|
|
$
|
25,676.3
|
|
|
$
|
32,525.0
|
|
|
$
|
(50,438.7
|
)
|
|
$
|
10,877.3
|
|
MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended September 27, 2019
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
743.7
|
|
|
$
|
—
|
|
|
$
|
743.7
|
|
|
Cost of sales
|
0.4
|
|
|
—
|
|
|
419.0
|
|
|
—
|
|
|
419.4
|
|
|
Gross (loss) profit
|
(0.4
|
)
|
|
—
|
|
|
324.7
|
|
|
—
|
|
|
324.3
|
|
|
Selling, general and administrative expenses
|
10.0
|
|
|
0.6
|
|
|
195.1
|
|
|
—
|
|
|
205.7
|
|
|
Research and development expenses
|
1.6
|
|
|
—
|
|
|
101.5
|
|
|
—
|
|
|
103.1
|
|
|
Restructuring charges, net
|
—
|
|
|
—
|
|
|
7.2
|
|
|
—
|
|
|
7.2
|
|
|
Operating (loss) income
|
(12.0
|
)
|
|
(0.6
|
)
|
|
20.9
|
|
|
—
|
|
|
8.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(1.4
|
)
|
|
(60.2
|
)
|
|
(72.7
|
)
|
|
56.7
|
|
|
(77.6
|
)
|
|
Interest income
|
2.5
|
|
|
0.1
|
|
|
57.0
|
|
|
(56.7
|
)
|
|
2.9
|
|
|
Other income, net
|
0.2
|
|
|
12.9
|
|
|
24.8
|
|
|
—
|
|
|
37.9
|
|
|
Intercompany fees
|
(4.6
|
)
|
|
(0.1
|
)
|
|
4.7
|
|
|
—
|
|
|
—
|
|
|
Equity in net income of subsidiaries
|
12.7
|
|
|
80.6
|
|
|
29.5
|
|
|
(122.8
|
)
|
|
—
|
|
|
(Loss) income from continuing operations before income taxes
|
(2.6
|
)
|
|
32.7
|
|
|
64.2
|
|
|
(122.8
|
)
|
|
(28.5
|
)
|
|
Income tax (benefit) expense
|
(1.5
|
)
|
|
3.3
|
|
|
(29.4
|
)
|
|
—
|
|
|
(27.6
|
)
|
|
(Loss) income from continuing operations
|
(1.1
|
)
|
|
29.4
|
|
|
93.6
|
|
|
(122.8
|
)
|
|
(0.9
|
)
|
|
Income (loss) from discontinued operations, net of income taxes
|
—
|
|
|
0.1
|
|
|
(0.3
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
Net (loss) income
|
(1.1
|
)
|
|
29.5
|
|
|
93.3
|
|
|
(122.8
|
)
|
|
(1.1
|
)
|
|
Other comprehensive loss, net of tax
|
(2.0
|
)
|
|
(2.0
|
)
|
|
(4.3
|
)
|
|
6.3
|
|
|
(2.0
|
)
|
|
Comprehensive (loss) income
|
$
|
(3.1
|
)
|
|
$
|
27.5
|
|
|
$
|
89.0
|
|
|
$
|
(116.5
|
)
|
|
$
|
(3.1
|
)
|
MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended September 28, 2018
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
799.9
|
|
|
$
|
—
|
|
|
$
|
799.9
|
|
|
Cost of sales
|
0.7
|
|
|
—
|
|
|
432.8
|
|
|
—
|
|
|
433.5
|
|
|
Gross (loss) profit
|
(0.7
|
)
|
|
—
|
|
|
367.1
|
|
|
—
|
|
|
366.4
|
|
|
Selling, general and administrative expenses
|
12.4
|
|
|
0.1
|
|
|
180.9
|
|
|
—
|
|
|
193.4
|
|
|
Research and development expenses
|
1.6
|
|
|
—
|
|
|
84.5
|
|
|
—
|
|
|
86.1
|
|
|
Restructuring charges, net
|
—
|
|
|
—
|
|
|
14.8
|
|
|
—
|
|
|
14.8
|
|
|
Non-restructuring impairment charge
|
—
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
Loss on divestiture
|
—
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
Operating (loss) income
|
(14.7
|
)
|
|
(0.1
|
)
|
|
84.3
|
|
|
—
|
|
|
69.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(1.6
|
)
|
|
(112.0
|
)
|
|
(257.4
|
)
|
|
277.4
|
|
|
(93.6
|
)
|
|
Interest income
|
2.4
|
|
|
249.6
|
|
|
27.4
|
|
|
(277.4
|
)
|
|
2.0
|
|
|
Other income (expense), net
|
2.3
|
|
|
(156.8
|
)
|
|
167.9
|
|
|
—
|
|
|
13.4
|
|
|
Intercompany fees
|
(3.5
|
)
|
|
(0.1
|
)
|
|
3.6
|
|
|
—
|
|
|
—
|
|
|
Equity in net income of subsidiaries
|
127.8
|
|
|
238.9
|
|
|
221.9
|
|
|
(588.6
|
)
|
|
—
|
|
|
Income (loss) from continuing operations before income taxes
|
112.7
|
|
|
219.5
|
|
|
247.7
|
|
|
(588.6
|
)
|
|
(8.7
|
)
|
|
Income tax benefit
|
(1.1
|
)
|
|
(2.4
|
)
|
|
(119.4
|
)
|
|
—
|
|
|
(122.9
|
)
|
|
Income from continuing operations
|
113.8
|
|
|
221.9
|
|
|
367.1
|
|
|
(588.6
|
)
|
|
114.2
|
|
|
Loss from discontinued operations, net of income taxes
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
|
Net income
|
113.8
|
|
|
221.9
|
|
|
366.7
|
|
|
(588.6
|
)
|
|
113.8
|
|
|
Other comprehensive income, net of tax
|
3.0
|
|
|
3.0
|
|
|
5.8
|
|
|
(8.8
|
)
|
|
3.0
|
|
|
Comprehensive income
|
$
|
116.8
|
|
|
$
|
224.9
|
|
|
$
|
372.5
|
|
|
$
|
(597.4
|
)
|
|
$
|
116.8
|
|
MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the nine months ended September 27, 2019
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,357.6
|
|
|
$
|
—
|
|
|
$
|
2,357.6
|
|
|
Cost of sales
|
1.7
|
|
|
—
|
|
|
1,307.6
|
|
|
—
|
|
|
1,309.3
|
|
|
Gross (loss) profit
|
(1.7
|
)
|
|
—
|
|
|
1,050.0
|
|
|
—
|
|
|
1,048.3
|
|
|
Selling, general and administrative expenses
|
35.2
|
|
|
1.2
|
|
|
625.4
|
|
|
—
|
|
|
661.8
|
|
|
Research and development expenses
|
4.8
|
|
|
—
|
|
|
263.2
|
|
|
—
|
|
|
268.0
|
|
|
Restructuring charges, net
|
—
|
|
|
—
|
|
|
11.2
|
|
|
—
|
|
|
11.2
|
|
|
Non-restructuring impairment charge
|
—
|
|
|
—
|
|
|
113.5
|
|
|
—
|
|
|
113.5
|
|
|
Operating (loss) income
|
(41.7
|
)
|
|
(1.2
|
)
|
|
36.7
|
|
|
—
|
|
|
(6.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(14.0
|
)
|
|
(192.3
|
)
|
|
(209.2
|
)
|
|
183.7
|
|
|
(231.8
|
)
|
|
Interest income
|
17.5
|
|
|
0.4
|
|
|
172.4
|
|
|
(183.7
|
)
|
|
6.6
|
|
|
Other income, net
|
8.9
|
|
|
43.6
|
|
|
76.1
|
|
|
—
|
|
|
128.6
|
|
|
Intercompany fees
|
(14.6
|
)
|
|
(0.1
|
)
|
|
14.7
|
|
|
—
|
|
|
—
|
|
|
Equity in net income of subsidiaries
|
200.8
|
|
|
448.7
|
|
|
292.0
|
|
|
(941.5
|
)
|
|
—
|
|
|
Income (loss) from continuing operations before income taxes
|
156.9
|
|
|
299.1
|
|
|
382.7
|
|
|
(941.5
|
)
|
|
(102.8
|
)
|
|
Income tax (benefit) expense
|
(3.7
|
)
|
|
9.9
|
|
|
(262.8
|
)
|
|
—
|
|
|
(256.6
|
)
|
|
Income from continuing operations
|
160.6
|
|
|
289.2
|
|
|
645.5
|
|
|
(941.5
|
)
|
|
153.8
|
|
|
Income from discontinued operations, net of income taxes
|
—
|
|
|
2.8
|
|
|
4.0
|
|
|
—
|
|
|
6.8
|
|
|
Net income
|
160.6
|
|
|
292.0
|
|
|
649.5
|
|
|
(941.5
|
)
|
|
160.6
|
|
|
Other comprehensive income, net of tax
|
1.7
|
|
|
1.7
|
|
|
2.4
|
|
|
(4.1
|
)
|
|
1.7
|
|
|
Comprehensive income
|
$
|
162.3
|
|
|
$
|
293.7
|
|
|
$
|
651.9
|
|
|
$
|
(945.6
|
)
|
|
$
|
162.3
|
|
MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the nine months ended September 28, 2018
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Net sales
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,380.7
|
|
|
$
|
—
|
|
|
$
|
2,380.7
|
|
|
Cost of sales
|
1.6
|
|
|
—
|
|
|
1,271.2
|
|
|
—
|
|
|
1,272.8
|
|
|
Gross (loss) profit
|
(1.6
|
)
|
|
—
|
|
|
1,109.5
|
|
|
—
|
|
|
1,107.9
|
|
|
Selling, general and administrative expenses
|
30.1
|
|
|
0.5
|
|
|
563.9
|
|
|
—
|
|
|
594.5
|
|
|
Research and development expenses
|
3.8
|
|
|
—
|
|
|
256.9
|
|
|
—
|
|
|
260.7
|
|
|
Restructuring charges, net
|
—
|
|
|
—
|
|
|
101.8
|
|
|
—
|
|
|
101.8
|
|
|
Non-restructuring impairment charge
|
—
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
|
Loss on divestiture
|
—
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
0.6
|
|
|
Operating (loss) income
|
(35.5
|
)
|
|
(0.5
|
)
|
|
184.3
|
|
|
—
|
|
|
148.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
(6.2
|
)
|
|
(323.2
|
)
|
|
(272.2
|
)
|
|
321.5
|
|
|
(280.1
|
)
|
|
Interest income
|
6.8
|
|
|
251.6
|
|
|
69.7
|
|
|
(321.5
|
)
|
|
6.6
|
|
|
Other income (expense), net
|
9.0
|
|
|
(154.0
|
)
|
|
162.8
|
|
|
—
|
|
|
17.8
|
|
|
Intercompany fees
|
(12.0
|
)
|
|
(0.1
|
)
|
|
12.1
|
|
|
—
|
|
|
—
|
|
|
Equity in net income of subsidiaries
|
145.9
|
|
|
647.2
|
|
|
425.4
|
|
|
(1,218.5
|
)
|
|
—
|
|
|
Income (loss) from continuing operations before income taxes
|
108.0
|
|
|
421.0
|
|
|
582.1
|
|
|
(1,218.5
|
)
|
|
(107.4
|
)
|
|
Income tax benefit
|
(3.4
|
)
|
|
(4.4
|
)
|
|
(196.1
|
)
|
|
—
|
|
|
(203.9
|
)
|
|
Income from continuing operations
|
111.4
|
|
|
425.4
|
|
|
778.2
|
|
|
(1,218.5
|
)
|
|
96.5
|
|
|
Income from discontinued operations, net of income taxes
|
—
|
|
|
—
|
|
|
14.9
|
|
|
—
|
|
|
14.9
|
|
|
Net income
|
111.4
|
|
|
425.4
|
|
|
793.1
|
|
|
(1,218.5
|
)
|
|
111.4
|
|
|
Other comprehensive loss, net of tax
|
(4.3
|
)
|
|
(4.3
|
)
|
|
(9.3
|
)
|
|
13.6
|
|
|
(4.3
|
)
|
|
Comprehensive income
|
$
|
107.1
|
|
|
$
|
421.1
|
|
|
$
|
783.8
|
|
|
$
|
(1,204.9
|
)
|
|
$
|
107.1
|
|
MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 27, 2019
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
$
|
(32.7
|
)
|
|
$
|
108.3
|
|
|
$
|
462.2
|
|
|
$
|
(3.7
|
)
|
|
$
|
534.1
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
—
|
|
|
(108.7
|
)
|
|
—
|
|
|
(108.7
|
)
|
|
Intercompany loan investment, net
|
57.8
|
|
|
—
|
|
|
(662.1
|
)
|
|
604.3
|
|
|
—
|
|
|
Investment in subsidiary
|
—
|
|
|
(678.6
|
)
|
|
—
|
|
|
678.6
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
13.7
|
|
|
—
|
|
|
13.7
|
|
|
Net cash from investing activities
|
57.8
|
|
|
(678.6
|
)
|
|
(757.1
|
)
|
|
1,282.9
|
|
|
(95.0
|
)
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance of external debt
|
—
|
|
|
—
|
|
|
695.0
|
|
|
—
|
|
|
695.0
|
|
|
Repayment of external debt
|
—
|
|
|
(135.2
|
)
|
|
(804.9
|
)
|
|
—
|
|
|
(940.1
|
)
|
|
Proceeds from exercise of share options
|
0.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.5
|
|
|
Repurchase of shares
|
(2.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
|
Intercompany loan borrowings, net
|
(24.9
|
)
|
|
629.2
|
|
|
—
|
|
|
(604.3
|
)
|
|
—
|
|
|
Intercompany dividends
|
—
|
|
|
—
|
|
|
(3.7
|
)
|
|
3.7
|
|
|
—
|
|
|
Capital contribution
|
—
|
|
|
—
|
|
|
678.6
|
|
|
(678.6
|
)
|
|
—
|
|
|
Other
|
2.1
|
|
|
—
|
|
|
(20.2
|
)
|
|
—
|
|
|
(18.1
|
)
|
|
Net cash from financing activities
|
(24.8
|
)
|
|
494.0
|
|
|
544.8
|
|
|
(1,279.2
|
)
|
|
(265.2
|
)
|
|
Effect of currency rate changes on cash
|
—
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
Net change in cash, cash equivalents and restricted cash, including cash classified within assets held for sale
|
0.3
|
|
|
(76.3
|
)
|
|
250.4
|
|
|
—
|
|
|
174.4
|
|
|
Less: Net change in cash classified within assets held for sale
|
—
|
|
|
—
|
|
|
(15.1
|
)
|
|
—
|
|
|
(15.1
|
)
|
|
Net change in cash, cash equivalents and restricted cash
|
0.3
|
|
|
(76.3
|
)
|
|
235.3
|
|
|
—
|
|
|
159.3
|
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
0.4
|
|
|
140.8
|
|
|
226.3
|
|
|
—
|
|
|
367.5
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
0.7
|
|
|
$
|
64.5
|
|
|
$
|
461.6
|
|
|
$
|
—
|
|
|
$
|
526.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$
|
0.7
|
|
|
$
|
64.5
|
|
|
$
|
433.6
|
|
|
$
|
—
|
|
|
$
|
498.8
|
|
|
Restricted cash, included in other assets at end of period
|
—
|
|
|
—
|
|
|
28.0
|
|
|
—
|
|
|
28.0
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
0.7
|
|
|
$
|
64.5
|
|
|
$
|
461.6
|
|
|
$
|
—
|
|
|
$
|
526.8
|
|
MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 28, 2018
(unaudited, in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mallinckrodt plc
|
|
Mallinckrodt International Finance S.A.
|
|
Other Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
Cash Flows From Operating Activities:
|
|
|
|
|
|
|
|
|
|
|
Net cash from operating activities
|
$
|
447.6
|
|
|
$
|
43.0
|
|
|
$
|
1,420.5
|
|
|
$
|
(1,430.0
|
)
|
|
$
|
481.1
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
—
|
|
|
—
|
|
|
(93.3
|
)
|
|
—
|
|
|
(93.3
|
)
|
|
Acquisitions, net of cash
|
—
|
|
|
—
|
|
|
(699.9
|
)
|
|
—
|
|
|
(699.9
|
)
|
|
Proceeds from divestitures, net of cash
|
—
|
|
|
—
|
|
|
313.2
|
|
|
—
|
|
|
313.2
|
|
|
Intercompany loan investment, net
|
(393.6
|
)
|
|
(85.2
|
)
|
|
(367.2
|
)
|
|
846.0
|
|
|
—
|
|
|
Investment in subsidiary
|
|
|
(168.3
|
)
|
|
—
|
|
|
168.3
|
|
|
—
|
|
|
Other
|
—
|
|
|
—
|
|
|
28.8
|
|
|
—
|
|
|
28.8
|
|
|
Net cash from investing activities
|
(393.6
|
)
|
|
(253.5
|
)
|
|
(818.4
|
)
|
|
1,014.3
|
|
|
(451.2
|
)
|
|
Cash Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
|
|
Issuance of external debt
|
—
|
|
|
600.0
|
|
|
57.2
|
|
|
—
|
|
|
657.2
|
|
|
Repayment of external debt
|
—
|
|
|
(1,166.8
|
)
|
|
(396.6
|
)
|
|
—
|
|
|
(1,563.4
|
)
|
|
Debt financing costs
|
—
|
|
|
(12.0
|
)
|
|
—
|
|
|
—
|
|
|
(12.0
|
)
|
|
Proceeds from exercise of share options
|
1.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
Repurchase of shares
|
(57.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(57.4
|
)
|
|
Intercompany loan borrowings, net
|
—
|
|
|
846.0
|
|
|
—
|
|
|
(846.0
|
)
|
|
—
|
|
|
Intercompany dividends
|
—
|
|
|
(814.2
|
)
|
|
(615.8
|
)
|
|
1,430.0
|
|
|
—
|
|
|
Capital contribution
|
—
|
|
|
—
|
|
|
168.3
|
|
|
(168.3
|
)
|
|
—
|
|
|
Other
|
2.0
|
|
|
—
|
|
|
(26.3
|
)
|
|
—
|
|
|
(24.3
|
)
|
|
Net cash from financing activities
|
(54.4
|
)
|
|
(547.0
|
)
|
|
(813.2
|
)
|
|
415.7
|
|
|
(998.9
|
)
|
|
Effect of currency rate changes on cash
|
—
|
|
|
—
|
|
|
(0.9
|
)
|
|
—
|
|
|
(0.9
|
)
|
|
Net change in cash, cash equivalents and restricted cash
|
(0.4
|
)
|
|
(757.5
|
)
|
|
(212.0
|
)
|
|
—
|
|
|
(969.9
|
)
|
|
Cash, cash equivalents and restricted cash at beginning of period
|
0.7
|
|
|
908.8
|
|
|
369.6
|
|
|
—
|
|
|
1,279.1
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
0.3
|
|
|
$
|
151.3
|
|
|
$
|
157.6
|
|
|
$
|
—
|
|
|
$
|
309.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
$
|
0.3
|
|
|
$
|
151.3
|
|
|
$
|
139.1
|
|
|
$
|
—
|
|
|
$
|
290.7
|
|
|
Restricted cash, included in other assets at end of period
|
—
|
|
|
—
|
|
|
18.5
|
|
|
—
|
|
|
18.5
|
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
0.3
|
|
|
$
|
151.3
|
|
|
$
|
157.6
|
|
|
$
|
—
|
|
|
$
|
309.2
|
|
Divestitures
On November 4, 2019, the Company announced it has completed the sale of BioVectra. Subsequent to September 27, 2019, the terms of the transaction were updated, with total consideration of up to $250.0 million including an upfront payment of $135.0 million and contingent consideration of $115.0 million based on the long-term performance of the business.
Financing Activities
On November 5, 2019, upon the terms and conditions set forth in a confidential offering memorandum dated November 5, 2019, Mallinckrodt International Finance S.A. and Mallinckrodt CB LLC, each a wholly owned subsidiary of the Company (the "Issuers") commenced private offers to exchange (the "Exchange Offers") any and all of (i) the 4.875% Senior Notes due April 2020 issued by the Issuers for new 10.000% Second Lien Senior Secured Notes due 2025 to be issued by the Issuers (the "New Notes") and (ii) the 5.750% Senior Notes due August 2022, 4.750% Senior Notes due April 2023, 5.625% Senior Notes due October 2023 and 5.500% Senior Notes due April 2025 issued by the Issuers (collectively, and together with the 4.875% Senior Notes due April 2020, the "Notes") for up to $355.0 million of New Notes. In connection with the Exchange Offers, the Issuers also commenced solicitations of consents from the holders of each series of Notes (other than the 4.750% Senior Notes due April 2023) to amend the indentures governing such series of Notes to eliminate certain of the covenants, restrictive provisions, events of default and related provisions therein.
On November 5, 2019, Deerfield Partners, L.P., Deerfield Special Situations Fund, L.P. and Deerfield Private Design Fund IV, L.P. (the "Exchanging Holders") entered into an exchange agreement (the "Exchange Agreement") with the Issuers pursuant to which such Exchanging Holders agreed to, among other things, exchange with the Issuers on the settlement date of the Exchange Offers, separate from such Exchange Offers, their holdings of Notes (comprised of approximately $67.6 million aggregate principal amount 4.875% Senior Notes due April 2020, approximately $258.7 million aggregate principal amount of the 4.750% Senior Notes due April 2023, approximately $98.5 million aggregate principal amount of the 5.625% Senior Notes due October 2023 and approximately $75.2 million aggregate principal amount of 5.500% Senior Notes due April 2025) for approximately $227.0 million aggregate principal amount of New Notes. The consummation of the Exchange Offers may have a material impact on the Company's financial condition, results of operations and cash flows.
Commitments and Contingencies
Certain litigation matters occurred during the nine months ended September 27, 2019 or prior, but had subsequent updates through the issuance of this report. See further discussion in Note 15.