MNK Q3 10-Q 06.26.15



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________
FORM 10-Q
 _________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 26, 2015

or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____

Commission File Number : 001-35803
 _________________________________
Mallinckrodt public limited company
(Exact name of registrant as specified in its charter)
 _________________________________
Ireland
 
98-1088325
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Perth House, Millenium Way,
Chesterfield, Derbyshire, United Kingdom, S41 8ND
(Address of principal executive offices) (Zip Code)

Telephone: +44 424 626 3051
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
x
 
 
Accelerated filer
 
o
 
 
 
 
 
Non-accelerated filer
 
o
(Do not check if smaller reporting company)
 
Smaller reporting company
 
o

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

Indicate number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Ordinary shares, $0.20 par value - 117,342,534 shares as of July 27, 2015




MALLINCKRODT PLC
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited).
 
 
Condensed Consolidated Statements of Income for the three and nine months ended June 26, 2015 and June 27, 2014.
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended June 26, 2015 and June 27, 2014.
 
Condensed Consolidated Balance Sheets as of June 26, 2015 and September 26, 2014.
 
Condensed Consolidated Statements of Cash Flows for the nine months ended June 26, 2015 and June 27, 2014.
 
Condensed Consolidated Statement of Changes in Shareholders' Equity for the period September 26, 2014 to June 26, 2015.
 
Notes to Condensed Consolidated Financial Statements.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Item 4.
Controls and Procedures.
 
 
 
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings.
Item 1A.
Risk Factors.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.
Defaults Upon Senior Securities.
Item 4.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
SIGNATURES








PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements.


MALLINCKRODT PLC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited, in millions, except per share data)

 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Net sales
$
965.1

 
$
653.1

 
$
2,741.3

 
$
1,751.1

Cost of sales
431.6

 
368.8

 
1,280.6

 
948.6

Gross profit
533.5

 
284.3

 
1,460.7

 
802.5

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
332.7

 
221.3

 
938.7

 
561.6

Research and development expenses
45.0

 
42.7

 
134.4

 
123.1

Separation costs
—

 
1.8

 
—

 
6.6

Restructuring charges, net
23.1

 
23.8

 
34.0

 
53.5

Gains on divestiture and license
(0.9
)
 
(0.9
)
 
(2.6
)
 
(14.7
)
Operating income (loss)
133.6

 
(4.4
)
 
356.2

 
72.4

 
 
 
 
 
 
 
 
Interest expense
(72.5
)
 
(22.7
)
 
(178.7
)
 
(44.9
)
Interest income
0.2

 
0.3

 
0.7

 
1.1

Other (expense) income, net
(0.5
)
 
0.1

 
7.7

 
(0.9
)
Income (loss) from continuing operations before income taxes
60.8

 
(26.7
)
 
185.9

 
27.7

 
 
 
 
 
 
 
 
Income tax expense (benefit)
3.3

 
(2.4
)
 
(40.2
)
 
(6.1
)
Income (loss) from continuing operations
57.5

 
(24.3
)
 
226.1

 
33.8

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of income taxes
0.5

 
0.2

 
23.4

 
(0.7
)
 
 
 
 
 
 
 
 
Net income (loss)
$
58.0

 
$
(24.1
)
 
$
249.5

 
$
33.1

 
 
 
 
 
 
 
 
Basic earnings (loss) per share (Note 7):
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.49

 
$
(0.42
)
 
$
1.94

 
$
0.58

Income (loss) from discontinued operations
—

 
—

 
0.20

 
(0.01
)
Net income (loss)
$
0.50

 
$
(0.41
)
 
$
2.14

 
$
0.57

 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
116.3

 
58.5

 
115.5

 
58.2

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share (Note 7):
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.48

 
$
(0.42
)
 
$
1.91

 
$
0.57

Income (loss) from discontinued operations
—

 
—

 
0.20

 
(0.01
)
Net income (loss)
$
0.49

 
$
(0.41
)
 
$
2.11

 
$
0.56

 
 
 
 
 
 
 
 
Diluted weighted-average shares outstanding
117.8

 
58.5

 
117.1

 
59.0


See Notes to Condensed Consolidated Financial Statements.



2



MALLINCKRODT PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited, in millions)


 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Net income (loss)
$
58.0

 
$
(24.1
)
 
$
249.5

 
$
33.1

Other comprehensive income (loss), net of tax:

 

 
 
 
 
Currency translation adjustments
5.1

 
(0.9
)
 
(53.8
)
 
(2.9
)
Unrecognized gain on derivatives, net of $-, $-, ($0.1) and ($0.1) tax
0.2

 
0.2

 
0.4

 
0.4

Unrecognized gain (loss) on benefit plans, net of ($2.7), ($2.2), ($2.8) and ($2.1) tax
4.5

 
4.8

 
5.4

 
4.5

Total other comprehensive loss, net of tax
9.8

 
4.1

 
(48.0
)
 
2.0

Comprehensive income (loss)
$
67.8

 
$
(20.0
)
 
$
201.5

 
$
35.1


See Notes to Condensed Consolidated Financial Statements.


3



MALLINCKRODT PLC
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited, in millions, except share data)

 
June 26,
2015
 
September 26,
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
225.3

 
$
707.8

Accounts receivable, less allowance for doubtful accounts of $8.9 and $6.6
624.6

 
545.6

Inventories
377.8

 
396.6

Deferred income taxes
143.5

 
165.2

Prepaid expenses and other current assets
170.0

 
255.8

Total current assets
1,541.2

 
2,071.0

Property, plant and equipment, net
1,015.5

 
949.2

Goodwill
3,234.0

 
2,401.9

Intangible assets, net
8,680.5

 
7,112.2

Other assets
408.0

 
330.5

Total Assets
$
14,879.2

 
$
12,864.8

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$
22.6

 
$
21.2

Accounts payable
142.5

 
128.7

Accrued payroll and payroll-related costs
91.5

 
125.1

Accrued royalties
26.1

 
68.0

Accrued and other current liabilities
476.8

 
561.8

Total current liabilities
759.5

 
904.8

Long-term debt
5,333.1

 
3,951.5

Pension and postretirement benefits
112.2

 
119.1

Environmental liabilities
74.0

 
59.9

Deferred income taxes
2,923.6

 
2,398.6

Other income tax liabilities
123.5

 
122.6

Other liabilities
255.2

 
350.3

Total Liabilities
9,581.1

 
7,906.8

Shareholders' Equity:
 
 
 
Preferred shares, $0.20 par value, 500,000,000 authorized; none issued and outstanding
—

 
—

Ordinary A shares, €1.00 par value, 40,000 authorized; none issued and outstanding
—

 
—

Ordinary shares, $0.20 par value, 500,000,000 authorized; 117,665,741 and 116,160,353 issued; 117,275,484 and 115,929,588 outstanding
23.5

 
23.2

Ordinary shares held in treasury at cost, 390,257 and 230,765
(32.9
)
 
(17.5
)
Additional paid-in capital
5,326.1

 
5,172.4

Retained earnings
(36.3
)
 
(285.8
)
Accumulated other comprehensive income
17.7

 
65.7

Total Shareholders' Equity
5,298.1

 
4,958.0

Total Liabilities and Shareholders' Equity
$
14,879.2

 
$
12,864.8


See Notes to Condensed Consolidated Financial Statements.


4



MALLINCKRODT PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in millions)

 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
Cash Flows From Operating Activities:
 
 
 
Net income
$
249.5

 
$
33.1

(Income) loss from discontinued operations, net of income taxes
(23.4
)
 
0.7

Income from continuing operations
226.1

 
33.8

Adjustments to reconcile net cash provided by operating activities:
 
 
 
Depreciation and amortization
481.2

 
158.7

Share-based compensation
93.9

 
14.4

Deferred income taxes
(135.2
)
 
(20.5
)
Non-cash restructuring charge
—

 
2.6

Other non-cash items
(37.8
)
 
17.3

Changes in assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable, net
(22.9
)
 
(25.7
)
Inventories
36.9

 
(7.5
)
Accounts payable
16.5

 
(29.0
)
Income taxes
61.6

 
(46.9
)
Other
(161.1
)
 
70.9

Net cash provided by operating activities
559.2

 
168.1

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(92.5
)
 
(80.1
)
Acquisitions and intangibles, net of cash acquired
(1,176.3
)
 
(1,303.2
)
Restricted cash
(21.9
)
 
4.1

Other
2.6

 
8.7

Net cash used in investing activities
(1,288.1
)
 
(1,370.5
)
Cash Flows From Financing Activities:
 
 
 
Issuance of external debt
1,720.0

 
1,296.8

Repayment of external debt and capital leases
(1,457.8
)
 
(31.2
)
Debt financing costs
(25.3
)
 
(32.2
)
Excess tax benefit from share-based compensation
30.4

 
5.2

Proceeds from exercise of share options
29.7

 
19.9

Repurchase of shares
(15.4
)
 
(1.9
)
Other
(28.1
)
 
—

Net cash provided by financing activities
253.5

 
1,256.6

Effect of currency rate changes on cash
(7.1
)
 
(1.8
)
Net (decrease) increase in cash and cash equivalents
(482.5
)
 
52.4

Cash and cash equivalents at beginning of period
707.8

 
275.5

Cash and cash equivalents at end of period
$
225.3

 
$
327.9


See Notes to Condensed Consolidated Financial Statements.



5



MALLINCKRODT PLC
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited, in millions)
 
 
Ordinary Shares
 
Treasury Shares
 
Additional
Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income
 
Total
Shareholders'
Equity
 
Number
 
Par
 Value
 
Number
 
Amount
 
 
Balance at September 26, 2014
116.2

 
$
23.2

 
0.2

 
$
(17.5
)
 
$
5,172.4

 
$
(285.8
)
 
$
65.7

 
$
4,958.0

Net income
—

 
—

 
—

 
—

 
—

 
249.5

 
—

 
249.5

Currency translation adjustments
—

 
—

 
—

 
—

 
—

 
—

 
(53.8
)
 
(53.8
)
Change in derivatives, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
0.4

 
0.4

Minimum pension liability, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
5.4

 
5.4

Share options exercised
1.0

 
0.2

 
—

 
—

 
29.5

 
—

 
—

 
29.7

Vesting of restricted shares
0.5

 
0.1

 
—

 
—

 
(0.1
)
 
—

 
—

 
—

Excess tax benefit from share-based compensation
—

 
—

 
—

 
—

 
30.4

 
—

 
—

 
30.4

Share-based compensation
—

 
—

 
—

 
—

 
93.9

 
—

 
—

 
93.9

Repurchase of shares
—

 
—

 
0.2

 
(15.4
)
 
—

 
—

 
—

 
(15.4
)
Balance at June 26, 2015
117.7

 
$
23.5

 
0.4

 
$
(32.9
)
 
$
5,326.1

 
$
(36.3
)
 
$
17.7

 
$
5,298.1

 

See Notes to Condensed Consolidated Financial Statements.


6



MALLINCKRODT PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in millions, except per share data and where indicated)

1.
Background and Basis of Presentation
Background
Mallinckrodt plc and its subsidiaries (collectively, "Mallinckrodt" or "the Company"), is a global specialty biopharmaceutical and medical imaging business that develops, manufactures, markets and distributes specialty pharmaceutical and biopharmaceutical products and medical imaging agents. Therapeutic areas of focus include autoimmune and rare disease specialty areas (including neurology, rheumatology, nephrology and pulmonology); neonatal critical care respiratory therapeutics; and analgesics and central nervous system drugs. The Company also supports the diagnosis of disease with nuclear medicine and contrast imaging agents. The Company believes its experience in the acquisition and management of highly regulated raw materials; deep regulatory expertise; and specialized chemistry, formulation and manufacturing capabilities have created compelling competitive advantages that it anticipates will sustain future revenue growth.
During the first quarter of fiscal 2015, the integration of Questcor Pharmaceuticals, Inc. ("Questcor") was substantially completed. With this, and given the increased significance of the Specialty Brands business to the Company's results and the expected long-term growth of this business as compared to the Specialty Generics business, the Company changed its reportable segments. The Company now presents the Specialty Brands and Specialty Generics businesses as reportable segments, along with the continued presentation of Global Medical Imaging as a reportable segment. The Company historically presented the Specialty Brands and Specialty Generics businesses within the Specialty Pharmaceuticals segment. Prior year amounts have been recast to conform to current presentation. The three reportable segments are further described below:

•
Specialty Brands produces and markets branded pharmaceuticals and biopharmaceuticals;
•
Specialty Generics produces specialty generic pharmaceuticals and active pharmaceutical ingredients ("API") consisting of biologics, medicinal opioids, synthetic controlled substances, acetaminophen and other active ingredients; and
•
Global Medical Imaging manufactures and markets contrast media and delivery systems ("CMDS") and radiopharmaceuticals (nuclear medicine).

In May 2015, the Board of Directors of Mallinckrodt plc approved a proposal to migrate the Company’s principal executive offices from Ireland to the United Kingdom. The Company remains incorporated in Ireland and continues to be subject to U.S. Securities and Exchange Commission ("SEC") reporting requirements and the applicable corporate governance rules of the New York Stock Exchange. 

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 Mallinckrodt plc, its wholly-owned subsidiaries and entities in which they own or control more than fifty percent of the voting shares, or have the ability to control through similar rights. 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 reflected as discontinued operations. Divestitures of product lines and businesses that did not qualify as discontinued operations have been reflected in operating income. All intercompany balances and transactions have been eliminated in consolidation and, in the opinion of management, all normal recurring adjustments necessary for a fair presentation have been included in the interim results reported. 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 and combined financial statements included in its Annual Report on Form 10-K filed with the SEC on November 24, 2014 and Current Report on Form 8-K filed with the SEC on April 3, 2015.



7



Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of September. The third fiscal quarters of 2015 and 2014 ended on June 26, 2015 and June 27, 2014, respectively. Unless otherwise indicated, the three and nine months ended June 26, 2015 refers to the thirteen and thirty-nine week period ended June 26, 2015 and the three and nine months ended June 27, 2014 refers to the thirteen and thirty-nine week period ended June 27, 2014.

2.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date," in February 2013. This update provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance. An entity is required to measure those obligations as the sum of the amount the entity has agreed to pay on the basis of its arrangement among its co-obligors, and any additional amounts it expects to pay on behalf of its co-obligors. The guidance also requires the entity to disclose the nature and amount of those obligations. The guidance was effective for the Company in the first quarter of fiscal 2015. The adoption did not have a material impact to the Company's financial condition, results of operations and cash flows.
FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," in July 2013. This update provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists, to eliminate diversity in practice in the presentation of unrecognized tax benefits in those instances. Except in certain circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. This guidance was effective for the Company in the first quarter of fiscal 2015. The adoption did not have a material impact to the Company's financial condition, results of operations and cash flows.
FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," in April 2014. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. This guidance is effective for the Company in the first quarter of fiscal 2016, with early adoption permitted. The Company is evaluating the impacts of this pronouncement with regard to our CMDS agreement, discussed further in Note 20, for potential disclosures in future filings and may consider early adoption of the guidance.
FASB issued ASU 2014-09, "Revenue from Contracts with Customers," in May 2014. The issuance of ASU 2014-09 and International Financial Reporting Standards ("IFRS") 15, "Revenue from Contracts with Customers," completes the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and IFRS. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, applying the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance is effective for the Company in the first quarter of fiscal 2019. Early adoption is permitted in the first quarter of fiscal 2018. The Company continues to assess the potential impact of the guidance.
FASB issued ASU 2015 - 03, "Interest - Imputation of Interest," in April 2015. The issuance of ASU 2015-03 is part of the FASB's initiative to simplify the presentation of debt issuance costs. Under the new guidance, debt issuance costs related to a recognized debt liability must be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The amortization of such costs should continue to be calculated using the interest method and be reported as interest expense. The guidance is effective for the Company in the first quarter of fiscal 2017. The adoption is not expected to have a material impact to the Company's financial condition, results of operations and cash flows.
FASB issued ASU 2015 - 11, "Simplifying the Measurement of Inventory," in July 2015. The issuance of ASU 2015-11 is part of the FASB's initiative to more closely align the measurement of inventory between GAAP and IFRS. Under the new guidance, inventory must be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The guidance is effective for the Company in the first quarter of fiscal 2017. The adoption is not expected to have a material impact to the Company's financial condition, results of operations and cash flows.


8



3.
License of Intellectual Property
The Company was involved in patent disputes with a counterparty relating to certain intellectual property relevant to extended-release oxymorphone. In December 2013, the counterparty agreed to pay the Company an upfront cash payment of $4.0 million and contractually obligated future payments of $8.0 million through July 2018, in exchange for the withdrawal of all claims associated with the intellectual property and a license to utilize the Company's intellectual property. The Company completed the earnings process associated with the agreement and recorded an $11.7 million gain, included within gains on divestiture and license, during the nine months ended June 27, 2014.

4.
Acquisitions and License Agreements
Business Acquisitions
Ikaria, Inc.
On April 16, 2015, the Company acquired Ikaria, Inc. ("Ikaria") through the acquisition of all the outstanding common stock of Compound Holdings II, Inc., the parent holding company of Ikaria, in a transaction valued at approximately $2.3 billion, net of cash acquired ("the Ikaria Acquisition"). Consideration for the transaction consisted of approximately $1.2 billion in cash paid to Compound Holdings II, Inc. shareholders and the assumption of approximately $1.1 billion of Ikaria third-party debt, which was repaid in conjunction with the Ikaria Acquisition. The acquisition and immediate repayment of debt was funded through the issuance of $1.4 billion aggregate principal amount of senior unsecured notes, a $240.0 million borrowing under a revolving credit facility, as discussed further in Note 11, and cash on hand. Ikaria's primary product is INOMAX® (nitric oxide) for inhalation ("Inomax"), a vital treatment option in neonatal critical care, which further accelerates the Company's growth in its Specialty Brands segment.

Questcor Pharmaceuticals
On August 14, 2014, the Company acquired all of the outstanding common stock of Questcor, a biopharmaceutical company, for total consideration of approximately $5.9 billion, comprised of cash consideration of $30.00 per share, 0.897 ordinary shares of the Company for each share of Questcor common stock owned and the portion of outstanding equity awards deemed to have been earned as of August 14, 2014 ("the Questcor Acquisition"). The acquisition was funded through the issuance of approximately 57 million ordinary shares, proceeds from the issuance of $900.0 million aggregate principal amount of senior unsecured notes, $700.0 million of borrowings under a senior secured term loan facility, $150.0 million of cash from a receivable securitization program, as further discussed in Note 11, and cash on hand. H.P. Acthar® Gel (repository corticotropin injection) ("Acthar"), Questcor's primary product, is focused on the treatment of patients with serious, difficult-to-treat autoimmune and rare diseases. Acthar is an injectable drug that is approved by the U.S. Food and Drug Administration ("FDA") for use in 19 indications, including the currently marketed areas of neurology, rheumatology, nephrology and pulmonology. As part of the acquisition, the Company also acquired BioVectra, Inc. ("BioVectra"), a specialty contract manufacturer that provides services to the global pharmaceuticals and biotechnology industry.

Cadence Pharmaceuticals
On March 19, 2014, the Company acquired all of the outstanding common stock of Cadence Pharmaceuticals, Inc. ("Cadence"), a biopharmaceutical company focused on commercializing products principally for use in the hospital setting, for total consideration of $14.00 per share in cash, or approximately $1.3 billion ("the Cadence Acquisition"). The acquisition was primarily funded through a $1.3 billion borrowing under a senior secured term loan credit facility, as further discussed in Note 11. Cadence's sole product, OFIRMEV® (acetaminophen) injection ("Ofirmev"), is a proprietary intravenous formulation of acetaminophen for the management of mild to moderate pain, the management of moderate to severe pain with adjunctive opioid analgesics and the reduction of fever. The Cadence Acquisition added a product to the Specialty Brands segment and provided the Company an opportunity to expand its reach into the adjacent acute care hospital market, in which Cadence had established a presence.

Fair Value Allocation
The following amounts represent the preliminary allocations of the fair value of the identifiable assets acquired and liabilities assumed for the Questcor Acquisition and Ikaria Acquisition, including preliminary goodwill, intangible assets and the related deferred tax balances. The Company expects to complete its valuation analysis and finalize deferred tax balances as of the acquisition date no later than twelve months from the date of the respective acquisitions. The changes in the purchase price allocation and preliminary goodwill based on the final valuation may include, but are not limited to, finalization of working capital settlements, the impact of U.S. state tax rates in determining the deferred tax balances and changes in assumptions utilized in the preliminary valuation report. During the nine months ended June 26, 2015, there were adjustments to the Questcor Acquisition purchase price allocation primarily

9



related to the ongoing evaluation of the non tax deductible branded pharmaceutical fee associated with net sales of Acthar and U.S. state deferred tax balances. The following also presents the final allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Cadence Acquisition. There were no measurement period adjustments recognized during the nine months ended June 26, 2015 that would amend the previously disclosed preliminary purchase price allocation for the Cadence Acquisition.
 
Ikaria
 
Questcor
 
Cadence
Cash and cash equivalents
$
77.3

 
$
445.1

 
$
43.2

Inventory
26.3

 
67.9

 
21.0

Intangible assets
1,971.0

 
5,601.1

 
1,300.0

Goodwill
814.2

 
1,789.4

 
318.1

Other assets, current and non-current (1)
173.3

 
274.3

 
18.0

Total assets acquired
3,062.1

 
8,177.8

 
1,700.3

Current Liabilities
32.3

 
168.9

 
48.8

Unpaid purchase consideration (current)
—

 
128.8

 
—

Other liabilities (non-current) less debt
9.1

 
186.8

 
—

Deferred tax liabilities, net (non-current)
646.1

 
1,906.8

 
292.3

Total Debt
1,121.0

 
—

 
30.0

Total liabilities assumed
1,808.5

 
2,391.3

 
371.1

Net assets acquired
$
1,253.6

 
$
5,786.5

 
$
1,329.2

(1)
This amount includes $73.8 million, $87.3 million and $14.7 million of accounts receivable for the Ikaria Acquisition, Questcor Acquisition and the Cadence Acquisition, respectively, which is also the gross contractual value.

The following is a reconciliation of the total consideration to net assets acquired:
 
Ikaria
 
Questcor
 
Cadence
Total consideration, net of cash
$
1,176.3

 
$
5,470.2

 
$
1,286.0

Plus: cash assumed in acquisition
77.3

 
445.1

 
43.2

Total consideration
1,253.6

 
5,915.3

 
1,329.2

Less: unpaid purchase consideration
—

 
(128.8
)
 
—

Net assets acquired
$
1,253.6

 
$
5,786.5

 
$
1,329.2


Intangible assets acquired consist of the following:
Ikaria
Amount
 
Amortization Period
Completed technology
$
1,820.0

 
15 years
Trademark
70.0

 
22 years
In-process research and development - terlipressin
81.0

 
Non-Amortizable
 
$
1,971.0

 
 

The completed technology and trademark intangible assets relate to Inomax. The fair values of the intangible assets were determined using the income approach, which is a valuation technique that provides an estimate of the fair value of the asset based on market participant expectations of the cash flows an asset would generate. The cash flows were discounted at various discount rates commensurate with the level of risk associated with each asset or their projected cash flows. Completed technology, trademark and in-process research and development ("IPR&D") terlipressin intangibles utilized discount rates of 14.5%, 14.5%, and 17.0%, respectively. The IPR&D discount rate, for terlipressin, was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDA approval process and risks associated with commercialization of a new product. Based on the Company's preliminary estimate, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, future product and device development anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.


10



Questcor
Amount
 
Amortization Period
Completed technology
$
5,343.3

 
18 years
Trademark
5.2

 
13 years
Customer relationships
34.3

 
12 years
In-process research and development
218.3

 
Non-Amortizable
 
$
5,601.1

 
 

The completed technology intangible asset relates to Acthar. The trademark and customer relationship intangible assets relate to BioVectra. The IPR&D relates to the development of Synacthen® (tetracosactide) ("Synacthen"), a synthetic pharmaceutical product for the U.S. market. The fair values of the intangible assets were determined using the income approach. The cash flows were discounted at various discount rates commensurate with the level of risk associated with each asset or their projected cash flows. Completed technology, customer relationships, trademark and IPR&D intangibles utilized discount rates of 14.5%, 10.0%, 10.0% and 16.0%, respectively. The IPR&D discount rate was developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDA approval process and risks associated with commercialization of a new product. Based on the Company's preliminary estimate, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. The majority of the assets acquired are included within the Company's Specialty Brands segment.

Cadence
Amount
 
Amortization Period
Completed technology
$
1,300.0

 
8 years

The completed technology intangible asset relates to Ofirmev, the rights to which have been in-licensed from Bristol-Myers Squibb Company ("BMS"). The fair value of the intangible asset was determined using the income approach and the cash flows were discounted at a 13.0% rate. For more information on the BMS license agreement, refer to "License Agreement" below. The excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents the assembled workforce, anticipated synergies and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.

Financial Results
The amount of net sales and earnings included in the Company's results for the periods presented were as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Net sales
 
 
 
 
 
 
 
Ikaria
$
84.8

 
$
—

 
$
84.8

 
$
—

Questcor
290.4

 
—

 
837.7

 
—

Cadence
62.1

 
53.2

 
201.6

 
58.5

 
$
437.3

 
$
53.2

 
$
1,124.1

 
$
58.5

Operating income (loss)
 
 
 
 
 
 
 
Ikaria
$
13.7

 
$
—

 
$
13.7

 
$
—

Questcor
56.2

 
—

 
144.7

 
—

Cadence
(28.9
)
 
(57.6
)
 
(70.5
)
 
(66.6
)
 
$
41.0

 
$
(57.6
)
 
$
87.9

 
$
(66.6
)





11



The amount of amortization on acquired intangible assets included within operating income (loss) for the periods presented was as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Intangible asset amortization
 
 
 
 
 
 
 
Ikaria
$
25.9

 
$
—

 
$
25.9

 
$
—

Questcor
75.3

 
—

 
226.1

 
—

Cadence
40.6

 
40.6

 
121.9

 
45.5

 
$
141.8

 
$
40.6

 
$
373.9

 
$
45.5


The amount of acquisition-related costs included with operating income (loss) for the periods presented was as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Acquisition-Related Costs
 
 
 
 
 
 
 
Ikaria
$
23.5

 
$
—

 
$
30.7

 
$
—

Questcor
—

 
16.6

 
(0.1
)
 
17.5

Cadence
—

 
—

 
—

 
17.6

 
$
23.5

 
$
16.6

 
$
30.6

 
$
35.1


During the three months ended June 26, 2015 and June 27, 2014, the Company recognized $4.0 million and $9.5 million, respectively, of expense primarily associated with fair value adjustments of acquired inventory. During the nine months ended June 26, 2015 and June 27, 2014, the Company recognized $39.2 million and $10.6 million, respectively, of expense associated with fair value adjustments of acquired inventory. This expense was included within cost of sales.

Unaudited Pro Forma Financial Information
The following unaudited pro forma financial information presents a summary of the combined results of operations for the periods indicated as if the Questcor Acquisition and Cadence Acquisition had been completed as of September 29, 2012 and the Ikaria Acquisition as of September 28, 2013. The pro forma financial information is based on the historical financial information for the Company, Ikaria, Questcor and Cadence, along with certain pro forma adjustments. These pro forma adjustments consist primarily of:
•
non-recurring costs related to the step-up in fair value of acquired inventory and transaction costs related to the acquisitions;
•
increased amortization expense related to the intangible assets acquired in the acquisitions;
•
increased interest expense to reflect the fixed rate unsecured notes and revolving credit facility entered into in connection with the Ikaria Acquisition (utilizing the interest rates of 4.875%, 5.50% and 3.00%), the fixed-rate senior unsecured notes and variable-rate term loan entered into in connection with the Questcor Acquisition (utilizing the interest rate in effect at the acquisition date of 3.50%) and the variable-rate term loan and revolving credit facility entered into in connection with the Cadence Acquisition (utilizing the interest rate in effect at the acquisition date of 3.50%), including interest and amortization of deferred financing costs and original issue discount; and
•
the related income tax effects.

12



The following unaudited pro forma financial information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed dates, nor is it necessarily an indication of future operating results. In addition, the unaudited pro forma financial information does not reflect the cost of any integration activities, benefits from any synergies that may be derived from the acquisitions or revenue growth that may be anticipated.
 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Net sales
$
982.1

 
$
1,033.5

 
$
2,964.8

 
$
2,870.0

Net income
81.1

 
56.6

 
264.2

 
99.5

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.70

 
$
0.53

 
$
2.29

 
$
0.93

Diluted earnings per share
0.69

 
0.52

 
2.26

 
0.92


License Agreement
Bristol-Myers Squibb
As part of the Cadence Acquisition, the Company acquired the exclusive development and commercialization rights to Ofirmev in the U.S. and Canada, as well as the rights to the patents and technology, which were originally in-licensed by Cadence from BMS in March 2006. BMS sublicensed these rights to Cadence under a license agreement with SCR Pharmatop S.A. ("Pharmatop"), and the Company has the right to grant sublicenses to third parties. Under this license agreement, the Company may be obligated to make future milestone payments of up to $25.0 million upon the achievement of certain levels of net sales, of which $10.0 million was paid during the nine months ended June 26, 2015. In addition, the Company is obligated to pay royalties on sales of the product. During the three and nine months ended June 26, 2015, the Company paid royalties of $19.5 million and $34.6 million, respectively. The royalties paid during the three and nine months ended June 27, 2014, were $5.4 million.


5.
Restructuring and Related Charges
During fiscal 2013, the Company launched a restructuring program designed to improve its cost structure ("the 2013 Mallinckrodt Program"). The 2013 Mallinckrodt Program includes actions across all segments, as well as within corporate functions. The Company expects to incur charges of $100.0 million to $125.0 million under this program as the specific actions required to execute on these initiatives are identified and approved, which are expected to be substantially completed by the end of fiscal 2016. In addition to the 2013 Mallinckrodt Program, the Company has taken restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges by segment were as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Specialty Brands
$
20.2

 
$
7.5

 
$
35.3

 
$
9.7

Specialty Generics
0.5

 
4.3

 
3.2

 
4.8

Global Medical Imaging
0.6

 
10.6

 
(6.5
)
 
37.2

Corporate
1.8

 
1.8

 
2.2

 
2.3

Restructuring and related charges, net
23.1

 
24.2

 
34.2

 
54.0

Less: accelerated depreciation
—

 
(0.4
)
 
(0.2
)
 
(0.5
)
Restructuring charges, net
$
23.1

 
$
23.8

 
$
34.0

 
$
53.5



13



Net restructuring and related charges were comprised of the following:
 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
2013 Mallinckrodt Program
$
3.7

 
$
23.0

 
$
1.7

 
$
53.9

Acquisitions
19.7

 
—

 
32.8

 
—

Other
(0.3
)
 
1.2

 
(0.3
)
 
0.1

Total
23.1

 
24.2

 
34.2

 
54.0

Less: non-cash charges, including accelerated share-based compensation expense
(1.5
)
 
(0.4
)
 
(9.4
)
 
(3.1
)
Total charges expected to be settled in cash
$
21.6

 
$
23.8

 
$
24.8

 
$
50.9


Non-cash charges during the three and nine months ended June 26, 2015 included $1.5 million and $9.2 million of accelerated share-based compensation expense related to employee terminations, primarily associated with the Questcor Acquisition.
The following table summarizes cash activity for restructuring reserves, substantially all of which are related to employee severance and benefits:
 
2013 Mallinckrodt Program
 
Acquisitions
 
Other
 
Total
Balance at September 26, 2014
$
26.6

 
$
7.9

 
$
0.4

 
$
34.9

Charges
9.9

 
24.8

 
—

 
34.7

Changes in estimate
(8.3
)
 
(1.3
)
 
(0.3
)
 
(9.9
)
Cash payments
(18.9
)
 
(13.3
)
 
(0.1
)
 
(32.3
)
Reclassifications (1)
(2.5
)
 
—

 
—

 
(2.5
)
Currency translation
(0.7
)
 
—

 
—

 
(0.7
)
Balance at June 26, 2015
$
6.1

 
$
18.1

 
$
—

 
$
24.2

(1)
Represents the reclassification of pension and other postretirement benefits from restructuring reserves to pension and postretirement obligations.

Net restructuring and related charges, including associated asset impairments, incurred cumulative-to-date related to the 2013 Mallinckrodt Program were as follows:
Specialty Brands
$
3.7

Specialty Generics
14.4

Global Medical Imaging
65.0

Corporate
7.9

 
$
91.0


Substantially all of the restructuring reserves were included in accrued and other current liabilities on the Company's unaudited condensed consolidated balance sheets.

6.
Income Taxes
The Company recognized an income tax expense of $3.3 million on income from continuing operations before income taxes of $60.8 million for the three months ended June 26, 2015 and an income tax benefit of $2.4 million on loss from continuing operations before income taxes of $26.7 million for the three months ended June 27, 2014. This resulted in effective tax rates of 5.4% and 9.0% for the three months ended June 26, 2015 and June 27, 2014, respectively. The Company recognized income tax benefits of $40.2 million and $6.1 million on income from continuing operations before income taxes of $185.9 million and $27.7 million for the nine months ended June 26, 2015 and June 27, 2014, respectively. This resulted in effective tax rates of negative 21.6% and negative 22.0% for the nine months ended June 26, 2015 and June 27, 2014, respectively.


14



The effective tax rate for the three months ended June 26, 2015, as compared with the three months ended June 27, 2014 decreased by 3.6 percentage points. Included within this net decrease was a 34.5 percentage point decrease predominately due to recent acquisitions, which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions, partially offset by a 30.8 percentage point increase attributable to diminutive income from continuing operations before taxes for the three months ended June 27, 2014. The change in the lower tax rate jurisdictions was primarily attributable to increased operating income partially offset by amortization. The change in the U.S. jurisdiction was primarily attributable to increased amortization and the cost of financing recent acquisitions. Of the 34.5 percentage point decrease in tax rate, 22.3 percentage points can be attributed to the change in operating income and 13.4 percentage points to the change in amortization, while acquisition financing and other non-acquisition related items increased the rate 1.2 percentage points.
The effective tax rate for the nine months ended June 26, 2015, as compared with the nine months ended June 27, 2014, increased by 0.4 percentage points. Included within this net increase was a 49.4 percentage points increase attributable to diminutive income from continuing operations before taxes for the nine months ended June 27, 2014, partially offset by a 49.1 percentage point decrease predominately due to recent acquisitions, which resulted in more income in lower tax rate jurisdictions and less income in the higher tax rate U.S. jurisdiction relative to income in all jurisdictions. The change in lower tax rate jurisdictions was primarily attributable to increased operating income partially offset by amortization. The change in the U.S. jurisdiction was primarily attributable to increased amortization and the cost of financing recent acquisitions. Of the 49.1 percentage point decrease in the tax rate, 28.0 percentage points can be attributed to the change in operating income, 20.9 percentage points to the change in amortization, and 0.2 percentage points to acquisition financing and other non-acquisition related items.
The Ikaria Acquisition resulted in a preliminary net deferred tax liability increase of $620.0 million. Significant components of this increase include $643.3 million of deferred tax liabilities associated with intangibles related to the Ikaria Acquisition and $17.6 million of deferred tax liability associated with property, plant and equipment, partially offset by $21.7 million of deferred tax assets associated with federal tax credits, and $13.1 million of deferred tax assets associated with financing repayments and $4.9 million of deferred tax assets associated with federal and state net operating losses.
As a part of the Questcor integration, the Company entered into an internal installment sale transaction during the three months ended December 26, 2014. The Questcor internal installment sale transaction resulted in a decrease of $1,488.7 million to the deferred tax liability associated with the Acthar intangible asset, a $1,515.9 million increase to the deferred tax liability associated with an installment sale note receivable, a $25.3 million increase to deferred tax charges and a $1.9 million increase to prepaid taxes.
During the nine months ended June 26, 2015, the Company recognized a $22.5 million benefit associated with the expiration of tax indemnifications, as further discussed in Note 16, in discontinued operations within the unaudited condensed consolidated statement of income. The Company realized a deferred tax asset of $8.2 million and released a corresponding valuation allowance, which resulted in no net tax consequences associated with this expiration.
The Company's unrecognized tax benefits, excluding interest, totaled $90.6 million at June 26, 2015 and $82.0 million at September 26, 2014. The net increase of $8.6 million primarily resulted from net increases to prior period tax positions of $10.7 million and current year activity of $6.0 million, which were partially offset by decreases in settlements of $6.6 million and the lapse of the applicable statutes of limitation of $1.5 million. If favorably settled, the $88.9 million of unrecognized tax benefits at June 26, 2015 would favorably impact the effective tax rate. The total amount of accrued interest related to these obligations was $41.5 million at June 26, 2015 and $45.1 million at September 26, 2014.
Additionally, the Company reduced its current and non-current payables by $3.3 million and $8.3 million for the three and nine months ended June 26, 2015 for matters other than uncertain tax positions related to periods prior to September 29, 2012. These reductions included payments of $3.3 million and $6.3 million resulting in a favorable impact to the tax provision for the three and nine months ended June 26, 2015.
It is reasonably possible that within the next twelve months, as a result of the resolution of various federal, state and foreign examinations and appeals, additions related to prior period tax positions and the expiration of various statutes of limitation, the unrecognized tax benefits will decrease by up to $16.2 million and the amount of interest and penalties will decrease by up to $10.1 million.
On May 21, 2015, the Board of Directors of Mallinckrodt plc approved a proposal to migrate the principal executive offices of Mallinckrodt plc from Ireland to the United Kingdom resulting in a corresponding migration of its tax residence. Mallinckrodt plc remains incorporated in Ireland. The tax regime applicable to holding companies resident in the United Kingdom allows Mallinckrodt plc to continue to have flexibility in structuring its subsidiary operations and enhanced global cash management.
The tax residency change impacts the Company’s analysis of its cumulative unrepatriated earnings. As of June 26, 2015, the cumulative amount of undistributed earnings of the Company's subsidiaries that may be subject to tax, but are considered to be indefinitely reinvested, was $404.4 million. It is not practicable to determined the cumulative amount of tax liability that would arise if these indefinitely reinvested earnings were remitted due to a variety of factors including the complexity of the Company's global legal entity structure as well as the timing, extent, and nature of any hypothetical repatriation of unremitted earnings. The net decrease in such undistributed earnings as compared to the period ended September 26, 2014 was attributable to the impact of the tax residency

15



change and associated jurisdictions that could be remitted in a tax-free manner. These decreases were partially offset by an increase in unrepatriated earnings associated with income and losses attributed to the nine months ended June 26, 2015.
The Company has also accrued a $0.8 million deferred tax liability associated with approximately $16.1 million of unrepatriated earnings that are not indefinitely reinvested.

7.
Earnings (Loss) per Share
Beginning in the fourth quarter of fiscal 2014, basic earnings (loss) per share was computed using the two-class method. The two-class method is an earnings allocation that determines earnings per share for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company's restricted stock awards, issued in conjunction with the Questcor Acquisition in August 2014, are considered participating securities as holders are entitled to receive non-forfeitable dividends during the vesting term. Diluted earnings per share includes securities that could potentially dilute basic earnings per share during a reporting period, which includes all share-based compensation awards other than participating securities. 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.
Prior to the fourth quarter of fiscal 2014, basic earnings (loss) per share was computed by dividing net income by the number of weighted-average shares outstanding during the period. Diluted earnings (loss) per share was computed using the weighted-average shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represented the incremental ordinary shares issuable for restricted share units and share option exercises. The Company calculated the dilutive effect of outstanding restricted share units and share options on earnings (loss) per share by application of the treasury stock method.
 
Three Months Ended
 
Nine Months Ended
 
June 26, 2015
 
June 27, 2014
 
June 26, 2015
 
June 27, 2014
Earnings (loss) per share numerator:
 
 
 
 
 
 
 
Income (loss) from continuing operations attributable to common shareholders before allocation of earnings to participating securities
$
57.5

 
$
(24.3
)
 
$
226.1

 
$
33.8

Less: earnings allocated to participating securities
0.4

 
—

 
2.0

 
—

Income (loss) from continuing operations attributable to common shareholders, after earnings allocated to participating securities
57.1

 
(24.3
)
 
224.1

 
33.8

Income (loss) from discontinued operations
0.5

 
0.2

 
23.4

 
(0.7
)
Less: earnings from discontinued operations allocated to participating securities
—

 
—

 
0.2

 
—

Income (loss) from discontinued operations attributable to common shareholders, after allocation of earnings to participating securities
0.5

 
0.2

 
23.2

 
(0.7
)
Net income (loss) attributable to common shareholders, after allocation of earnings to participating securities
$
57.6

 
$
(24.1
)
 
$
247.3

 
$
33.1

Earnings (loss) per share denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
116.3

 
58.5

 
115.5

 
58.2

Impact of dilutive securities
1.5

 
—

 
1.6

 
0.8

Weighted-average shares outstanding - diluted
117.8

 
58.5

 
117.1

 
59.0

Basic earnings (loss) per share attributable to common shareholders
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.49

 
$
(0.42
)
 
$
1.94

 
$
0.58

Income (loss) from discontinued operations
—

 
—

 
0.20

 
(0.01
)
Net income (loss) attributable to common shareholders
$
0.50

 
$
(0.41
)
 
$
2.14

 
$
0.57

Diluted earnings (loss) per share attributable to common shareholders
 
 
 
 
 
 
 
Income (loss) from continuing operations
$
0.48

 
$
(0.42
)
 
$
1.91

 
$
0.57

Income (loss) from discontinued operations
—

 
—

 
0.20

 
(0.01
)
Net income (loss) attributable to common shareholders
$
0.49

 
$
(0.41
)
 
$
2.11

 
$
0.56


There were no anti-dilutive equity awards excluded from the computation of earnings per share for the three and nine months ended June 26, 2015.

The computation of diluted earnings per share for the three months ended June 27, 2014 excludes 3.4 million shares of equity awards because the effect of including such shares would have been anti-dilutive due to the net loss for the period. Had these awards not been anti-dilutive, they would have resulted in dilution of 1.0 million shares for the three months ended June 27, 2014. The computation of diluted earnings per-share for the nine months ended June 27, 2014 excludes less than 0.1 million shares of equity awards because the effect of including such shares would have been anti-dilutive.

16



8.
Inventories
Inventories were comprised of the following at the end of each period: 
 
June 26,
2015
 
September 26,
2014
Raw materials and supplies
$
89.0

 
$
73.6

Work in process
173.3

 
212.1

Finished goods
115.5

 
110.9

 
$
377.8

 
$
396.6


    
9.
Property, Plant and Equipment
The gross carrying amount and accumulated depreciation of property, plant and equipment at the end of each period was as follows:
 
June 26,
2015
 
September 26, 2014
Property, plant and equipment, gross
$
2,003.8

 
$
1,888.4

Less: accumulated depreciation
(988.3
)
 
(939.2
)
Property, plant and equipment, net
$
1,015.5

 
$
949.2


Depreciation expense for property, plant and equipment was $30.4 million and $30.4 million during the three months ended June 26, 2015 and June 27, 2014, respectively, and $82.5 million and $82.8 million during the nine months ended June 26, 2015 and June 27, 2014, respectively. Depreciation expense included depreciation on demonstration equipment of $0.4 million and $1.9 million for the three months ended June 26, 2015 and June 27, 2014, respectively, and $1.3 million and $3.9 million for the nine months ended June 26, 2015 and June 27, 2014, respectively. Demonstration equipment was included within other assets on the unaudited condensed consolidated balance sheets.

10.
Goodwill and Intangible Assets
The gross carrying amount and accumulated impairment of goodwill by segment at the end of each period were as follows:
 
June 26, 2015
 
September 26, 2014
 
Gross
Carrying
Amount
 
Accumulated Impairment
 
Gross
Carrying
Amount
 
Accumulated Impairment
Specialty Brands
$
3,027.0

 
$
—

 
$
2,194.9

 
$
—

Specialty Generics
207.0

 
—

 
207.0

 
—

Global Medical Imaging
219.7

 
(219.7
)
 
219.7

 
(219.7
)
Total
$
3,453.7

 
$
(219.7
)
 
$
2,621.6

 
$
(219.7
)

During the nine months ended June 26, 2015 the gross carrying value of goodwill increased by$814.2 million due to the Ikaria Acquisition and by $17.9 million resulting from adjustments to the Questcor Acquisition purchase price allocation.

17



The gross carrying amount and accumulated amortization of intangible assets at the end of each period were as follows:
 
June 26, 2015
 
September 26, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortizable:
 
 
 
 
 
 
 
Completed technology
$
8,860.1

 
$
723.0

 
$
7,040.1

 
$
339.7

Licenses
185.1

 
96.7

 
185.1

 
87.3

Customer relationships
30.2

 
3.6

 
33.8

 
0.6

Trademarks
82.5

 
5.3

 
13.0

 
4.1

Other
6.7

 
6.7

 
6.7

 
5.0

Total
$
9,164.6

 
$
835.3

 
$
7,278.7

 
$
436.7

Non-Amortizable:
 
 
 
 
 
 
 
Trademarks
$
35.0

 
 
 
$
35.0

 
 
In-process research and development
316.2

 
 
 
235.2

 
 
Total
$
351.2

 
 
 
$
270.2

 
 

Intangible asset amortization expense was $149.6 million and $51.6 million during the three months ended June 26, 2015 and June 27, 2014, respectively. Intangible asset amortization expense was $398.7 million and $75.9 million during the nine months ended June 26, 2015 and June 27, 2014, respectively. The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
 
 
Remainder of fiscal 2015
$
154.9

Fiscal 2016
618.8

Fiscal 2017
616.9

Fiscal 2018
607.9

Fiscal 2019
607.6




18



11.
Debt
Debt was comprised of the following at the end of each period:
 
June 26,
2015
 
September 26, 2014
Current maturities of long-term debt:
 
 
 
2.85% term loan due April 2016
$
—

 
$
0.4

Term loan due March 2021
19.9

 
18.2

4.00% term loan due February 2022
1.1

 
1.2

Capital lease obligation and vendor financing agreements
1.6

 
1.4

Total current debt
22.6

 
21.2

Long-term debt:

 

Variable-rate receivable securitization
153.0

 
150.0

2.85% term loan due April 2016
—

 
2.7

3.50% notes due April 2018
300.0

 
300.0

4.875% notes due April 2020
700.0

 
—

Term loan due March 2021
1,957.9

 
1,972.1

4.00% term loan due February 2022
7.7

 
9.6

9.50% debentures due May 2022
10.4

 
10.4

5.75% notes due August 2022
900.0

 
900.0

8.00% debentures due March 2023
4.4

 
8.0

4.75% notes due April 2023
598.4

 
598.3

5.50% notes due April 2025
700.0

 
—

Capital lease obligation and vendor financing agreements
1.3

 
0.4

Total long-term debt
5,333.1

 
3,951.5

Total debt
$
5,355.7

 
$
3,972.7


In April 2013, Mallinckrodt International Finance S.A. ("MIFSA"), a subsidiary of the Company, issued and sold in a private placement $300.0 million aggregate principal amount of 3.50% senior unsecured notes due April 2018 and $600.0 million aggregate principal amount of 4.75% senior unsecured notes due April 2023 (collectively, "the Notes"). The Notes are subject to an indenture which contains customary affirmative and negative covenants. Mallinckrodt plc has fully and unconditionally guaranteed the Notes on an unsecured and unsubordinated basis. MIFSA pays interest on the Notes semiannually in arrears on April 15th and October 15th of each year.
In March 2014, in connection with the Cadence Acquisition, MIFSA and Mallinckrodt CB LLC ("MCB"), each a wholly-owned subsidiary of the Company, entered into senior secured credit facilities consisting of a $1.3 billion term loan facility due 2021 ("the March 2014 Term Loan") and a $250.0 million revolving credit facility due 2019 ("the Revolver") (collectively, "the Facilities"). The Facilities are fully and unconditionally guaranteed by Mallinckrodt plc, certain of its direct or indirect wholly-owned U.S. subsidiaries and each of its direct or indirect wholly-owned subsidiaries that owns directly or indirectly any such wholly-owned U.S. subsidiary (collectively, "the Guarantors"). The Facilities contain customary affirmative and negative covenants and are secured by a security interest in certain assets of MIFSA, MCB and the Guarantors. The Facilities bear interest at LIBOR plus a margin based on the Company's total net leverage ratio, and the March 2014 Term Loan is subject to a minimum LIBOR level of 0.75%. Interest payment dates are variable based on the LIBOR rate utilized, but the Company generally expects interest to be payable every 90 days. The March 2014 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal amount of the March 2014 Term Loan payable on the last day of each calendar quarter, which commenced June 30, 2014, with the remaining balance payable on the due date, March 19, 2021. The Revolver contains a $150.0 million letter of credit provision, of which none had been issued as of June 26, 2015. The fee applied to outstanding letters of credit is based on the interest rate applied to borrowings. As of June 26, 2015, the applicable interest rate on outstanding borrowings under the Revolver would have been approximately 2.77%; however, there were no outstanding borrowings. As of June 26, 2015, the applicable interest rate for the March 2014 Term Loan was 3.25% and outstanding borrowings totaled approximately $1.3 billion.
In July 2014, Mallinckrodt Securitization S.À.R.L. ("Mallinckrodt Securitization"), a wholly-owned special purpose subsidiary of the Company, entered into a $160.0 million accounts receivable securitization facility that matures in July 2017 ("the Receivable Securitization"). In January 2015, Mallinckrodt Securitization amended the Receivable Securitization with third-party lenders to increase the borrowing limit from $160.0 million to $250.0 million. The terms of the Receivable Securitization, and the determination of interest rates, were largely unchanged. Mallinckrodt Securitization may, from time to time, obtain up to $250.0 million in third-party borrowings secured by certain receivables, which may be increased to $300.0 million upon approval of the third-party lenders,

19



subject to certain conditions. The Receivable Securitization agreements contain customary representations, warranties and affirmative and negative covenants. Loans under the Receivable Securitization bear interest (including facility fees) at a rate equal to one-month LIBOR plus a margin of 0.80%, and are repaid as required under the limits established by the borrowing base, at maturity or on an interim basis at management's discretion. As of June 26, 2015, the applicable interest rate on outstanding borrowings under the Receivable Securitization was 0.99% and outstanding borrowings totaled $153.0 million.
In August 2014, MIFSA and MCB issued $900.0 million aggregate principal amount of 5.75% senior unsecured notes due August 1, 2022 ("the 2022 Notes"). The 2022 Notes are guaranteed on an unsecured basis by certain of MIFSA's subsidiaries and are subject to an indenture that contains certain customary covenants and events of default. The indenture also allows for early redemption under certain circumstances. MIFSA will pay interest on the 2022 Notes semiannually in arrears on February 1st and August 1st of each year, which commenced on February 1, 2015.
In August 2014, MIFSA and MCB entered into a $700.0 million senior secured term loan facility ("the August 2014 Term Loan"). The August 2014 Term Loan is an incremental tranche under the credit agreement governing the Facilities entered into in March 2014, and has substantially similar terms to the March 2014 Term Loan (other than pricing), including the determination of interest rates and quarterly principal amortization payments equal to 0.25% of the original principal amount of the August 2014 Term Loan. The quarterly principal payments commenced on December 31, 2014, with the remaining balance payable on the due date of March 19, 2021. Mallinckrodt plc and its subsidiaries (other than MIFSA, MCB and the subsidiaries of MIFSA that guarantee the Facilities) will not guarantee the August 2014 Term Loan, and the August 2014 Term Loan will not be secured by the assets of such entities. The August 2014 Term Loan bears interest under substantially similar terms of the March 2014 Term Loan, including the use of LIBOR rates with a minimum floor, except that the margin applied to LIBOR is not dependent upon the Company's total net leverage ratio. At June 26, 2015, the applicable interest rate for the August 2014 Term Loan was 3.50% and outstanding borrowings totaled $693.5 million.
On April 15, 2015, MIFSA and MCB issued $700.0 million aggregate principal amount of 4.875% senior unsecured notes due April 15, 2020 ("the 2020 Notes") and $700.0 million aggregate principal amount of 5.50% senior unsecured notes due April 15, 2025 ("the 2025 Notes", and together with the 2020 Notes, the "Ikaria Notes"). The Ikaria Notes are guaranteed by Mallinckrodt plc and each of its subsidiaries that guarantee the obligations under the Facilities, which following the Ikaria Acquisition includes Compound Holdings II, Inc. and its U.S. subsidiaries. The Ikaria Notes are subject to an indenture that contains certain customary covenants and events of default (subject in certain cases to customary grace and cure periods). The occurrence of an event of default under the indenture could result in the acceleration of the Ikaria Notes and could cause a cross-default that could result in the acceleration of other indebtedness of the Company. The Issuers may redeem some or all of the (i) 2020 Notes prior to April 15, 2017 and (ii) 2025 Notes prior to April 15, 2020, in each case, by paying a “make-whole” premium. The Issuers may redeem some or all of the (i) 2020 Notes on or after April 15, 2017 and (ii) 2025 Notes on or after April 15, 2020, in each case, at specified redemption prices. In addition, prior to (i) April 15, 2017, in the case of the 2020 Notes, and (ii) April 15, 2018, in the case of the 2025 Notes, the Issuers may redeem up to 40% of the aggregate principal amount of the 2020 Notes or 2025 Notes, as the case may be, with the net proceeds of certain equity offerings. The Issuers are obligated to offer to repurchase (a) each series of Notes at a price of 101% of their principal amount plus accrued and unpaid interest, if any, as a result of certain change of control events and (b) the Notes at a price of 100% of their principal amount plus accrued and unpaid interest, if any, in the event of certain net asset sales. These obligations are subject to certain qualifications and exceptions. The Company will pay interest on the Ikaria Notes semiannually on April 15th and October 15th of each year, commencing on October 15, 2015.
As of June 26, 2015, the Company was, and expects to remain, in compliance with the provisions and covenants associated with its debt agreements.

12.
Retirement Plans
The net periodic benefit cost for the Company's defined benefit pension plans was as follows:
 
Three Months Ended
 
Nine Months Ended
 
June 26,
2015
 
June 27,
2014
 
June 26,
2015
 
June 27,
2014
Service cost
$
1.2


$
1.3

 
$
3.6

 
$
3.8

Interest cost
4.4


4.9

 
13.3

 
14.8

Expected return on plan assets
(5.8
)

(6.1
)
 
(17.3
)
 
(18.3
)
Amortization of net actuarial loss
2.4


2.2

 
7.1

 
6.4

Amortization of prior service (credit) cost
(0.2
)

(0.2
)
 
(0.6
)
 
(0.5
)
Plan settlements
3.4

 
2.6

 
4.6

 
2.9

Net periodic benefit cost
$
5.4


$
4.7

 
$
10.7

 
$
9.1


20




The net periodic benefit credit for the Company's postretirement benefit plans for the three months ended June 26, 2015 and June 27, 2014 was $0.5 million and $1.7 million, respectively, and for the nine months ended June 26, 2015 and June 27, 2014 was $1.5 million and $5.3 million, respectively. The individual components of the credit were not material.
Net periodic benefit cost (credit) for the Company's defined benefit pension plans and postretirement benefit plans was included within cost of sales and selling, general and administrative expenses on the unaudited condensed consolidated statements of income.
The Company does not anticipate making material involuntary contributions in fiscal 2015, but may elect to make voluntary contributions to its defined benefit pension plans or its postretirement benefit plans during fiscal 2015.

13.
Accumulated Other Comprehensive Income
The following summarizes the change in accumulated other comprehensive income for the nine months ended June 26, 2015:
 
Currency Translation
 
Unrecognized Gain (Loss) on Derivatives
 
Unrecognized Gain (Loss) on Benefit Plans
 
Accumulated Other Comprehensive Income
Balance at September 26, 2014
$
131.0

 
$
(6.8
)
 
$
(58.5
)
 
$
65.7

Other comprehensive income before reclassifications
(53.8
)
 
—

 
0.3

 
(53.5
)
Amounts reclassified from accumulated other comprehensive income
—

 
0.4

 
5.1

 
5.5

Net current period other comprehensive income (loss)
(53.8
)
 
0.4

 
5.4

 
(48.0
)
Balance at June 26, 2015
$
77.2

 
$
(6.4
)
 
$
(53.1
)
 
$
17.7


The following summarizes reclassifications out of accumulated other comprehensive income for the three and nine months ended June 26, 2015:
 
Amount Reclassified from
Accumulated Other Comprehensive Income
 
 
 
Three Months Ended June 26, 2015
 
Nine Months Ended 
 June 26, 2015
 
Line Item in the Unaudited Condensed Consolidated
Statement of Income
Amortization of unrealized gain on derivatives
$
0.2

 
$
0.5

 
Interest expense
Income tax provision
—

 
(0.1
)
 
Income tax benefit
Net of income taxes
0.2

 
0.4

 
 
 
 
 
 
 
 
Amortization of pension and post-retirement benefit plans:
 
 
 
 
 
Net actuarial loss
2.4

 
7.1

 
(1) 
Prior service credit
(1.2
)
 
(3.5
)
 
(1) 
Plan settlements
3.4

 
4.6

 
 
Total before tax
4.6

 
8.2

 
 
Income tax provision
(1.7
)
 
(3.1
)
 
Income tax benefit
Net of income taxes
2.9

 
5.1

 
 
 
 
 
 
 
 
Total reclassifications for the period
$
3.1

 
$
5.5

 
 
(1)
These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 12 for additional details.


21



The following summarizes the changes in accumulated other comprehensive income for the nine months ended June 27, 2014:
 
Currency Translation
 
Unrecognized Gain (Loss) on Derivatives
 
Unrecognized Gain (Loss) on Benefit Plans
 
Accumulated Other Comprehensive Income
Balance at September 27, 2013
$
158.6

 
$
(7.3
)
 
$
(42.8
)
 
$
108.5

Other comprehensive income before reclassifications
(2.9
)
 
—

 
3.2

 
0.3

Amounts reclassified from accumulated other comprehensive income
—

 
0.4

 
1.3

 
1.7

Net current period other comprehensive income (loss)
(2.9
)
 
0.4

 
4.5

 
2.0

Balance at June 27, 2014
$
155.7

 
$
(6.9
)
 
$
(38.3
)
 
$
110.5


The following summarizes reclassifications out of accumulated other comprehensive income for the three and nine months ended June 27, 2014:
 
Amount Reclassified from
Accumulated Other Comprehensive Income
 
 
 
Three Months Ended June 27, 2014
 
Nine Months Ended June 27, 2014
 
Line Item in the Unaudited Condensed Consolidated
Statement of Income
Amortization of unrealized gain on derivatives
$
0.2

 
$
0.5

 
Interest expense
Income tax provision
—

 
(0.1
)
 
Income tax benefit
Net of income taxes
0.2

 
0.4

 
 
 
 
 
 
 
 
Amortization of pension and post-retirement benefit plans:
 
 
 
 
 
Net actuarial loss
2.2

 
6.4

 
(1) 
Prior service credit
(2.5
)
 
(7.4
)
 
(1) 
Plan settlements
2.6

 
2.9

 
 
Total before tax
2.3

 
1.9

 
 
Income tax provision
(0.7
)
 
(0.6
)
 
Income tax benefit
Net of income taxes
1.6

 
1.3

 
 
 
 
 
 
 
 
Total reclassifications for the period
$
1.8

 
$
1.7

 
 
(1)
These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 12 for additional details.

14.
Transactions with Former Parent Company
On June 28, 2013, the Pharmaceuticals business of Covidien plc, which was subsequently acquired by Medtronic plc, ("Covidien") was transferred to Mallinckrodt plc, thereby completing its legal separation from Covidien ("the Separation"). Prior to the completion of the Separation on June 28, 2013, the Company was part of Covidien and, as such, transactions between Covidien and the Company were considered related party transactions. The continuing relationship between Covidien and the Company was primarily governed through agreements entered into as part of the Separation, including a separation and distribution agreement, a tax matters agreement and a transition services agreement. These agreements were filed with the SEC as Exhibits 2.1, 10.1 and 10.3, respectively, to the Company's Current Report on Form 8-K filed on July 1, 2013. Further information on these agreements and other historical related party transactions, is set forth in the Company's Annual Report on Form 10-K filed with the SEC on November 24, 2014.

Sales and Purchases
During the three months ended June 26, 2015 and June 27, 2014, the Company sold inventory to Covidien in the amount of $9.4 million and $11.7 million, respectively, which is included in net sales in the unaudited condensed consolidated statements of income. During the nine months ended June 26, 2015 and June 27, 2014, the Company sold inventory to Covidien in the amount of $28.8 million and $34.9 million, respectively. The Company also purchases inventory from Covidien. The Company recognized cost of sales from these inventory purchases of $4.1 million and $5.1 million during the three months ended June 26, 2015 and June 27, 2014, respectively, and $12.9 million and $24.4 million during the nine months ended June 26, 2015 and June 27, 2014, respectively.


22



Balance Sheet Impacts
Subsequent to the Separation, the Company and Covidien maintain an ongoing relationship in which each party may provide services to the other party, including the distribution of goods. As a result of these relationships, the unaudited condensed consolidated balance sheets as of June 26, 2015 and September 26, 2014 included $6.8 million and $82.2 million, respectively, of amounts due to the Company from Covidien, within prepaid expenses and other current assets, and $3.8 million and $84.5 million, respectively, of amounts the Company owed Covidien, included within accrued and other liabilities.

Transition Services Agreement
The Company and Covidien entered into a transition services agreement in connection with the Separation pursuant to which the Company and Covidien provided each other, on an interim and transitional basis, various services including, but not limited to, treasury administration, information technology services, non-exclusive distribution and importation services for the Company's products in certain countries outside the U.S., regulatory, general and administrative services and other support services. The agreed-upon charges for such services were generally intended to allow the servicing party to recover all out-of-pocket costs and expenses, and included a predetermined profit margin. The Company terminated the transition services agreement during the first quarter of fiscal 2015.

15.
Guarantees
In disposing of assets or businesses, the Company has historically provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to the 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 their 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 June 26, 2015 and September 26, 2014 was $15.4 million and $16.6 million, respectively, of which $12.7 million and $13.9 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 at June 26, 2015 and September 26, 2014. As of June 26, 2015, the maximum future payments the Company could be required to make under these indemnification obligations was $71.0 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $19.0 million and $19.4 million remained in other assets on the unaudited condensed consolidated balance sheets at June 26, 2015 and September 26, 2014, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 16. In addition, the Company is liable for product performance; however, the Company believes, given the information currently available, that their ultimate resolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.
The Company is required to provide the U.S. Nuclear Regulatory Commission financial assurance demonstrating its ability to fund the decommissioning of its Maryland Heights, Missouri radiopharmaceuticals production facility upon closure, though the Company does not intend to close this facility. The Company has provided this financial assurance in the form of a $57.2 million surety bond. As of June 26, 2015, the Company had various other letters of credit and guarantee and surety bonds totaling $34.1 million.
In April 2015, the Company terminated a letter of credit to guarantee decommissioning costs associated with its Saint Louis, Missouri plant and placed $21.1 million of restricted cash on deposit with a trustee. This restricted cash is included within prepaid expenses and other current assets in the condensed consolidated balance sheet as of June 26, 2015.
In addition, the separation and distribution agreement entered into with Covidien at the Separation provides for cross-indemnities principally designed to place financial responsibility of the obligations and liabilities of the Company's business with the Company and financial responsibility for the obligations and liabilities of Covidien's remaining business with Covidien, among other indemnities.

23



16.
Commitments and Contingencies
The Company is subject to various legal proceedings and claims, including patent infringement claims, product liability matters, 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 resolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.

Governmental Proceedings
In November 2011 and October 2012, the Company received subpoenas from the U.S. Drug Enforcement Administration requesting production of documents relating to its suspicious order monitoring program.
In September 2012, Questcor received a subpoena from the United States Attorney's Office ("the USAO") for the Eastern District of Pennsylvania for information relating to its promotional practices. Questcor has also been informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC are participating in the investigation to review Questcor's promotional practices and related matters.
In June 2014, Questcor received a subpoena and Civil Investigative Demand ("CID") from the Federal Trade Commission ("FTC") seeking documentary materials and information regarding the FTC's investigation into whether Questcor's acquisition of certain rights to develop, market, manufacture, distribute, sell and commercialize Synacthen Depot® from Novartis AG and Novartis Pharma AG (collectively, "Novartis") violates antitrust laws. Subsequently, a small number of states commenced similar investigations focused on whether the transaction violates state antitrust laws. The Company is not aware of any existing or pending litigation in connection with these investigations.
In November 2014, the Company received a CID from the Civil Medicaid Fraud Division of the Texas Attorney General's Office. According to the CID, the Attorney General's office is investigating the possibility of false reporting of information by the Company regarding the prices of certain of its drugs used by Texas Medicaid to establish reimbursement rates for pharmacies that dispensed the Company's drugs to Texas Medicaid recipients.
The Company is in the process of responding to each of the subpoenas and CIDs and intends to cooperate fully in each investigation.
Mallinckrodt Inc. v. U.S. Food and Drug Administration and United States of America. The Company filed a Complaint for Declaratory and Injunctive Relief ("the Complaint") in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States of America in November 2014 for judicial review of what the Company believes is the FDA's inappropriate and unlawful reclassification of the Company's Methylphenidate HCl Extended-Release tablets USP (CII) ("Methylphenidate ER") in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("Orange Book") on November 13, 2014. In its complaint, the Company has asked the court to: issue an injunction to (a) set aside the FDA's reclassification of the Company's Methylphenidate ER products from freely substitutable at the pharmacy level (class AB) to presumed to be therapeutically inequivalent (class BX) in the Orange Book and (b) prohibit the FDA from reclassifying the Company's Methylphenidate ER products in the future without following applicable legal requirements; and issue a declaratory judgment that the FDA's action reclassifying the Company's Methylphenidate ER products in the Orange Book is unlawful. The Company concurrently filed a motion with the same court requesting an expedited hearing to issue a temporary restraining order ("TRO") directing the FDA to reinstate the Orange Book AB rating for the Company's Methylphenidate ER products on a temporary basis. The court denied the Company's motion for a TRO. In December 2014, the FDA filed a motion to dismiss the Compliant with the district court. The Company filed its opposition to the motion to dismiss in January 2015, and concurrently filed a motion for summary judgment. On July 29, 2015, the court granted the FDA’s motion to dismiss with respect to three of the five counts in the Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts.  The Company intends to appeal the court’s decision to the U.S. Court of Appeals for the Fourth Circuit.

Patent/Antitrust Litigation
Tyco Healthcare Group LP, et al. v. Mutual Pharmaceutical Company, Inc. In March 2007, the Company filed a patent infringement suit in the U.S. District Court for the District of New Jersey against Mutual Pharmaceutical Co., Inc., et al. (collectively, "Mutual") after Mutual submitted an Abbreviated New Drug Application ("ANDA") to the FDA seeking to sell a generic version of the Company's 7.5mg RESTORIL™ sleep aid product. Mutual also filed antitrust and unfair competition counterclaims. The patents at issue have since expired or been found invalid. The trial court issued an opinion and order granting the Company's motion for summary judgment regarding Mutual's antitrust and unfair competition counterclaims. Mutual appealed this decision to the U.S. Court of Appeals for the Federal Circuit and the Federal Circuit issued a split decision, affirming the trial court in part and remanding to the

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trial court certain counterclaims for further proceedings. The Company filed a motion for summary judgment with the U.S. District Court regarding the remanded issues. In May 2015, the trial court issued an opinion granting-in-part and denying-in-part the Company’s motion for summary judgment.
'222 and '218 Patent Litigation: Exela Pharma Sciences, LLC. In August 2011, Cadence, a subsidiary of the Company, and Pharmatop, the owner of the two U.S. patents licensed exclusively by Cadence, filed suit in the U.S. District Court for the District of Delaware against Exela Pharma Sciences, LLC, Exela PharmaSci, Inc. and Exela Holdings, Inc. (collectively, "Exela"), alleging that Exela infringed U.S. Patent Nos. 6,028,222 ("the '222 patent") and 6,992,218 ("the '218 patent") by submitting an ANDA to the FDA seeking to sell a generic version of Ofirmev. The filing of the lawsuit triggered a stay of FDA approval of the Exela ANDA until the earlier of the expiration of a 30-month period, the expiration of the '222 and '218 patents, the entry of a settlement order or consent decree stating that the '222 and '218 patents are invalid or not infringed, a decision in the case concerning infringement or validity that is favorable to Exela, or such shorter or longer period as the court may order. After a bench trial, the court ruled in favor of Cadence in November 2013 and found that Exela's ANDA infringed the '222 and '218 patents. Exela appealed the decision and oral arguments in the appeal occurred in November 2014. In March 2015, the Federal Circuit affirmed the district court decision.
'222 and '218 Patent Litigation: InnoPharma Licensing LLC and InnoPharma, Inc. In September 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against InnoPharma Licensing LLC and InnoPharma, Inc. (collectively "InnoPharma") following receipt of an August 2014 notice from InnoPharma concerning its submission of a New Drug Application ("NDA"), containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev.
'222 and '218 Patent Litigation: Agila Specialties Private Limited, Inc. and Agila Specialties Inc. (a Mylan Inc. Company), (collectively "Agila"). In December 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against Agila following receipt of a November 2014 notice from Agila concerning its submission of a NDA containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. 
The Company intends to vigorously enforce its intellectual property rights relating to Ofirmev to prevent the marketing of infringing generic or competing products prior to the expiration of the Cadence patents. An adverse outcome in either the Exela, InnoPharma or Agila matters ultimately could result in the launch of one or more generic versions of Ofirmev before the expiration of the last of the listed patents on June 6, 2021 (or December 6, 2021 if pediatric exclusivity is granted), which could adversely affect the Company's ability to successfully maximize the value of Ofirmev and have an adverse effect on its financial condition, results of operations and cash flows.
'222 and '218 Patents: Ex Parte Reexamination. In September 2012, Exela filed with the U.S. Patent and Trademark Office ("USPTO") a Request for Ex Parte Reexamination of the '222 patent and the USPTO granted that request. The reexamination process requires the USPTO to consider the scope and validity of the patent based on substantial new questions of patentability raised by a third-party or the USPTO. Cadence and Pharmatop have filed, with the USPTO, a patent owner's statement commenting on the reexamination request, and thereafter the parties made various submissions. In March 2015, the USPTO issued an ex parte reexamination certificate for the '222 patent listing the claims that resulted from the reexamination proceeding.
In addition, in January 2014, an unidentified third-party filed, with the USPTO, a Request for Ex Parte Reexamination of the '218 patent. The reexamination request was granted. In July 2014, the USPTO issued a Non-Final Office Action in the '218 reexamination in which it rejected certain claims. In September 2014, Cadence and Pharmatop filed an Amendment and Response to the Office Action. Cadence and Pharmatop filed a supplemental response in January 2015. In June 2015, the USPTO issued a Final Office Action confirming that effectively all of the original claims were patentable, and Cadence and Pharmatop subsequently filed an Amendment and Response to the Final Office Action. On July 15, 2015, the USPTO confirmed in the reexamination proceeding for the '218 patent that original claims 1-10 and 12-19 as well as amended original dependent claim 11 and six new dependent claims are all patentable and will be issued in an upcoming reexamination certificate.Because the Company and Pharmatop believe that the scope and validity of the patent claims in the '222 reexamination certificate and the soon-to-issue '218 patent reexamination certificate are appropriate and that the USPTO's prior issuances of the patents were correct, the Company, in conjunction with Pharmatop, will vigorously defend these patents.
'218 Patent Litigation: Exela Pharma Sciences, LLC. In April 2012, Exela filed suit against David J. Kappos and the USPTO in the U.S. District Court for the Eastern District of Virginia for declaratory judgment seeking a reversal of the USPTO's decision not to act on a petition by Exela to vacate the USPTO's April 2003 order reviving the international application for the '218 patent. The lawsuit followed the USPTO's rejection of Exela's petition to the USPTO filed in November 2011, which sought to vacate the April 2003 order. The USPTO determined that Exela lacked standing to seek such relief. Exela also seeks declaratory judgment that the USPTO's rules and regulations that allow for revival of abandoned, international patent applications under the "unintentional" standard are invalid, and seeks similar relief in connection with one or more counterclaims it has filed in the Delaware litigation. Cadence intervened in this lawsuit and in December 2012, the district court dismissed the case with prejudice as barred by the applicable statute of limitations. Exela appealed the dismissal to the Court of Appeals for the Federal Circuit and oral arguments were held in February 2014. In March 2015, the Federal Circuit affirmed the district court's dismissal of the Exela complaint.

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'222 and '218 Patent Litigation Settlements. Four other similar cases involving generic and/or competing versions of Ofirmev have previously settled. In each settlement, the defendant was granted the non-exclusive right to market a generic intravenous acetaminophen product in the U.S. under its respective ANDA after December 6, 2020, or earlier under certain circumstances. In connection with those settlements, one settling party was granted the exclusive right of first refusal to negotiate an agreement with Cadence to market an authorized generic of Ofirmev in the U.S. in the event that Cadence elects to launch an authorized generic version of the product. If that settling party elects not to exercise its right of first refusal, Cadence has agreed to grant a similar right of first refusal to another settling party. As part of another settlement, Cadence entered into a supply agreement under which an affiliate of one of the settling parties will develop, manufacture and supply commercial quantities of Ofirmev to the Company if certain regulatory approvals are obtained.
Inomax Patents: Inter Partes Review ("IPR") Proceedings. In February 2015 and March 2015, the USPTO issued Notices of Filing Dates Accorded to Petitions for IPR petitions filed by Praxair Distribution, Inc. concerning ten patents covering Inomax. Patent Owner Preliminary responses for all of the IPR petitions were filed in May 2015 and June 2015. On July 29, 2015 the USPTO Patent Trial and Appeal Board ("PTAB") issued rulings denying the institution of four of the five IPR petitions challenging the five patents expiring in 2029.  The PTAB also issued a ruling on July 29, 2015 that instituted the IPR proceeding in the fifth of this group of patents and the PTAB is statutorily required to complete the IPR process on that patent within one year.  The timing for the USPTO to determine whether to grant the petition(s) to institute an IPR in the second set of five patents that expire in 2031 is within three months of receiving the Patent Owner Preliminary Response(s) filed in late June 2015.
Inomax Patent Litigation: Praxair Distribution, Inc. and Praxair, Inc. (collectively “Praxair”). In February 2015, INO Therapeutics LLC and Ikaria, Inc., 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 generic version of Inomax.
The Company intends to vigorously enforce its intellectual property rights relating to Inomax to prevent the marketing of infringing generic products prior to the expiration of the patents covering Inomax. An adverse outcome in either the IPRs or the Praxair litigation ultimately could result in the launch of a generic version of Inomax before the expiration of the last of the listed patents on January 6, 2031 (July 6, 2031 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
Retrophin Litigation. In January 2014, Retrophin, Inc. ("Retrophin") filed a lawsuit against Questcor in the U.S. District Court for the Central District of California, alleging a variety of federal and state antitrust violations based on Questcor's acquisition from Novartis of certain rights to develop, market, manufacture, distribute, sell and commercialize Synacthen. In June 2015, the parties entered into a binding settlement agreement, under the terms of which Retrophin agreed to dismiss the litigation with prejudice and Questcor agreed to make a one-time cash payment to Retrophin in the amount of $15.5 million.
Glenridge Litigation. In June 2011, Glenridge Pharmaceuticals, LLC ("Glenridge"), filed a lawsuit against Questcor in the Superior Court of California, Santa Clara County, alleging that Questcor had underpaid royalties to Glenridge under a royalty agreement related to net sales of Acthar. In August 2012, Questcor filed a separate lawsuit against the three principals of Glenridge, as well as Glenridge, challenging the enforceability of the royalty agreement. In August 2013, the lawsuits were consolidated into one case in the Superior Court of California, Santa Clara County. In October 2014, the parties entered into a binding term sheet settling the lawsuit. Under the terms of the settlement, the royalty rate payable by Questcor was reduced, royalties were capped instead of being payable for so long as Acthar was sold and Questcor agreed to pay Glenridge a reduced amount in satisfaction of royalties Questcor had previously accrued but not paid during the course of the lawsuit. In February 2015, the settlement agreement was finalized, with terms consistent with the October 2014 term sheet.
Putative Class Action Securities Litigation. In September 2012, a putative class action lawsuit was filed against Questcor and certain of its officers and directors in the U.S. District Court for the Central District of California, captioned John K. Norton v. Questcor Pharmaceuticals, et al., No. SACvl2-1623 DMG (FMOx). The complaint purports to be brought on behalf of shareholders who purchased Questcor common stock between April 26, 2011 and September 21, 2012. The complaint generally alleges that Questcor and certain of its officers and directors engaged in various acts to artificially inflate the price of Questcor stock and enable insiders to profit through stock sales. The complaint asserts that Questcor and certain of its officers and directors violated sections l0(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended ("the Exchange Act"), by making allegedly false and/or misleading statements concerning the clinical evidence to support the use of Acthar for indications other than infantile spasms, the promotion of the sale and use of Acthar in the treatment of multiple sclerosis and nephrotic syndrome, reimbursement for Acthar from third-party insurers, and Questcor's outlook and potential market growth for Acthar. The complaint seeks damages in an unspecified amount and equitable relief against the defendants. This lawsuit has been consolidated with four subsequently-filed actions asserting similar claims under the caption: In re Questcor Securities Litigation, No. CV 12-01623 DMG (FMOx). In October 2013, the District Court granted in part and denied in part Questcor's motion to dismiss the consolidated amended complaint. In October 2013, Questcor filed an answer to the consolidated amended complaint and fact discovery was concluded in January 2015. In April 2015, the parties

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executed a long-form settlement agreement, under the terms of which Questcor agreed to pay $38.0 million to resolve the plaintiff's claims, inclusive of all fees and costs. Questcor and the individual defendants maintain that the plaintiffs' claims are without merit, and have entered into the settlement to eliminate the uncertainties, burden and expense of further protracted litigation. During the nine months ended June 26, 2015, the Company established a $38.0 million reserve for this settlement, which was subsequently paid to a settlement fund. The settlement is subject to a number of conditions, including, among other things, final court approval following notice to the class.
Federal Shareholder Derivative Litigation. In October 2012, another alleged shareholder filed a derivative lawsuit in the U.S. District Court for the Central District of California captioned Gerald Easton v. Don M. Bailey, et al., No. SACV12-01716 DOC (JPRx). The suit asserts claims substantially identical to those asserted in the do Valle derivative action, described below, against the same defendants. This lawsuit has been consolidated with five subsequently-filed actions asserting similar claims under the caption: In re Questcor Shareholder Derivative Litigation, CV 12- 01716 DMG (FMOx). Following the resolution of the motion to dismiss in the consolidated putative securities class action, the court issued an order staying the federal derivative action until the earlier of: (a) 60 days after the resolution of any motion for summary judgment filed in the putative class action lawsuit, (b) 60 days after the deadline to file a motion for summary judgment in the putative class action lawsuit, if none is filed, or (c) the execution of any settlement agreement (including any partial settlement agreement) to resolve the putative class action lawsuit. In July 2015, the parties stipulated to a dismissal of the derivative case and Questcor agreed to make a one-time cash payment to plaintiffs in the form of a mootness fee.
State Shareholder Derivative Litigation. In October 2012, an alleged shareholder filed a derivative lawsuit purportedly on behalf of Questcor against certain of its officers and directors in the Superior Court of the State of California, Orange County, captioned Monika do Valle v. Virgil D. Thompson, et al., No. 30-2012-00602258-CU-SL-CXC. The complaint asserted claims for breach of fiduciary duty, abuse of control, mismanagement and waste of corporate assets arising from substantially similar allegations as those contained in the putative securities class action described above, as well as from allegations relating to sales of Questcor common stock by the defendants and repurchases of Questcor common stock. The complaint sought an unspecified sum of damages and equitable relief. On October 24, 2012, another alleged shareholder filed a derivative lawsuit purportedly on behalf of Questcor against certain of its officers and directors in the Superior Court of the State of California, Orange County, captioned Jones v. Bailey, et al., Case No. 30-2012-00608001-CU-MC-CXC. The suit asserted claims substantially identical to those asserted in the do Valle derivative action. In February 2013, the court issued an order staying the state derivative actions until the putative federal securities class action and federal derivative actions are resolved. In May 2014, the court granted plaintiffs' request for dismissal without prejudice of the Jones action. In November 2014, the do Valle matter was voluntarily dismissed.
Put Options Securities Action. In March 2013, individual traders of put options filed a securities complaint in the U.S. District Court for the Central District of California captioned David Taban, et al. v. Questcor Pharmaceuticals, Inc., No. SACV13-0425. The complaint generally asserts claims against Questcor and certain of its officers and directors for violations of the Exchange Act and for state law fraud and fraudulent concealment based on allegations similar to those asserted in the putative securities class action described above. The complaint seeks compensatory and punitive damages of an unspecified amount. Following the resolution of the motion to dismiss in the consolidated putative securities class action, the court issued an order staying this action until the earlier of: (a) 60 days after the resolution of any motion for summary judgment filed in the putative class action lawsuit, (b) 60 days after the deadline to file a motion for summary judgment in the putative class action lawsuit, if none is filed, or (c) the execution of any settlement agreement (including any partial settlement agreement) to resolve the putative class action lawsuit. In May 2015, the parties entered into a binding settlement agreement, under the terms of which plaintiffs agreed to dismiss the litigation with prejudice and Questcor agreed to make a one-time cash payment to plaintiffs.

Pricing Litigation
State of Utah v. Apotex Corp., et al. The Company, along with several other pharmaceutical companies, is a defendant in this matter which was filed in May 2008, and is pending in the Third Judicial Circuit of Salt Lake County, Utah. The State of Utah alleges, generally, that the defendants reported false pricing information in connection with certain drugs that are reimbursable under Utah Medicaid, resulting in overpayment by Utah Medicaid for those drugs, and is seeking monetary damages and attorneys' fees. The Company believes that it has meritorious defenses to these claims and is vigorously defending against them.

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 June 26, 2015, it was probable that it would incur remedial costs in the range of $40.9 million to $114.2 million. The Company also concluded that, as of June 26, 2015, the best estimate within this range was $77.5 million, of which $3.5 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the unaudited condensed consolidated balance sheet at June 26, 2015. While it is not possible at this time

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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.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. The Company is a successor in interest to International Minerals and Chemicals Corporation ("IMC"). Between 1967 and 1982, IMC leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the 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 U.S. Environmental Protection Agency ("EPA") (together, "the Government Agencies") issued a special notice letter to General