Document

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 29, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

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.)
3 Lotus Park, The Causeway, Staines-Upon-Thames,
Surrey TW18 3AG, United Kingdom
(Address of principal executive offices) (Zip Code)

Telephone: +44 017 8463 6700
(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, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
 
Large accelerated filer
 
x
 
 
Accelerated filer
 
o
Non-accelerated filer
 
o
(Do not check if smaller reporting company)
 
Smaller reporting company
 
o
 
 
 
 
 
Emerging growth company
 
o

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes o      No  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 - 83,209,486 shares as of August 3, 2018




MALLINCKRODT PLC
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 








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
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net sales
$
631.7

 
$
600.1

 
$
1,204.3

 
$
1,160.1

Cost of sales
314.7

 
280.4

 
610.5

 
540.3

Gross profit
317.0

 
319.7

 
593.8

 
619.8

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
164.3

 
214.6

 
356.7

 
432.2

Research and development expenses
81.3

 
52.3

 
145.4

 
97.3

Restructuring charges, net
58.7

 
0.6

 
81.8

 
10.9

Losses (gains) on divestiture
—

 
2.1

 
—

 
(57.0
)
Operating income
12.7

 
50.1

 
9.9

 
136.4

 
 
 
 
 
 
 
 
Interest expense
(95.1
)
 
(92.2
)
 
(186.5
)
 
(186.4
)
Interest income
1.4

 
0.6

 
4.6

 
1.5

Other (expense) income, net
(0.5
)
 
6.3

 
4.1

 
(73.6
)
Loss from continuing operations before income taxes
(81.5
)
 
(35.2
)
 
(167.9
)
 
(122.1
)
 
 
 
 
 
 
 
 
Income tax benefit
(53.4
)
 
(53.6
)
 
(96.8
)
 
(95.6
)
(Loss) income from continuing operations
(28.1
)
 
18.4

 
(71.1
)
 
(26.5
)
 
 
 
 
 
 
 
 
Income from discontinued operations, net of income taxes
43.7

 
44.4

 
68.7

 
488.5

 
 
 
 
 
 
 
 
Net income (loss)
$
15.6

 
$
62.8

 
$
(2.4
)
 
$
462.0

 
 
 
 
 
 
 
 
Basic earnings per share (Note 8):
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.34
)
 
$
0.19

 
$
(0.84
)
 
$
(0.26
)
Income from discontinued operations
0.53

 
0.45

 
0.81

 
4.84

Net income
$
0.19

 
$
0.64

 
$
(0.03
)
 
$
4.58

 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
83.2

 
98.5

 
84.7

 
100.9

 
 
 
 
 
 
 
 
Diluted earnings per share (Note 8):
 
 
 
 
 
 
 
(Loss) income from continuing operations
$
(0.34
)
 
$
0.19

 
$
(0.84
)
 
$
(0.26
)
Income from discontinued operations
0.53

 
0.45

 
0.81

 
4.84

Net income (loss)
$
0.19

 
$
0.64

 
$
(0.03
)
 
$
4.58

 
 
 
 
 
 
 
 
Diluted weighted-average shares outstanding
83.2

 
98.7

 
84.7

 
100.9




See Notes to Condensed Consolidated Financial Statements.



2



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


 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net income (loss)
$
15.6

 
$
62.8

 
$
(2.4
)
 
$
462.0

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
(5.0
)
 
5.0

 
(7.3
)
 
7.4

Derivatives, net of $-, ($0.2), $- and ($0.2) tax
0.1

 
0.4

 
0.5

 
0.6

Benefit plans, net of $-, $-, $- and ($31.4) tax
—

 
(0.7
)
 
(0.5
)
 
45.9

Investments, net of $-, $-, $-, and $- tax
—

 
(2.8
)
 
—

 
10.6

Total other comprehensive (loss) income, net of tax
(4.9
)
 
1.9

 
(7.3
)
 
64.5

Comprehensive income (loss)
$
10.7

 
$
64.7

 
$
(9.7
)
 
$
526.5


See Notes to Condensed Consolidated Financial Statements.


3



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

 
June 29,
2018
 
December 29,
2017
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
235.7

 
$
1,260.9

Accounts receivable, less allowance for doubtful accounts of $3.7 and $2.8
337.6

 
275.4

Inventories
184.4

 
128.7

Prepaid expenses and other current assets
135.6

 
74.7

Notes receivable
—

 
154.0

Current assets held for sale
1,112.5

 
391.5

Total current assets
2,005.8

 
2,285.2

Property, plant and equipment, net
430.1

 
413.2

Goodwill
3,676.7

 
3,482.7

Intangible assets, net
8,769.0

 
8,261.0

Long-term assets held for sale
—

 
742.7

Other assets
168.2

 
156.2

Total Assets
$
15,049.8

 
$
15,341.0

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$
22.2

 
$
313.7

Accounts payable
75.8

 
77.3

Accrued payroll and payroll-related costs
74.6

 
78.4

Accrued interest
60.4

 
57.0

Income taxes payable
39.9

 
15.5

Accrued and other current liabilities
441.0

 
368.5

Current liabilities held for sale
170.6

 
140.0

Total current liabilities
884.5

 
1,050.4

Long-term debt
6,335.1

 
6,420.9

Pension and postretirement benefits
65.3

 
67.1

Environmental liabilities
62.2

 
62.8

Deferred income taxes
809.7

 
749.1

Other income tax liabilities
129.2

 
94.1

Long-term liabilities held for sale
—

 
22.6

Other liabilities
289.4

 
352.0

Total Liabilities
8,575.4

 
8,819.0

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; 92,548,700 and 92,196,662 issued;
83,097,746 and 86,336,232 outstanding

18.5

 
18.4

Ordinary shares held in treasury at cost, 9,450,954 and 5,860,430
(1,619.1
)
 
(1,564.7
)
Additional paid-in capital
5,508.9

 
5,492.6

Retained earnings
2,587.8

 
2,588.6

Accumulated other comprehensive loss
(21.7
)
 
(12.9
)
Total Shareholders' Equity
6,474.4

 
6,522.0

Total Liabilities and Shareholders' Equity
$
15,049.8

 
$
15,341.0


See Notes to Condensed Consolidated Financial Statements.


4



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

 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
Cash Flows From Operating Activities:
 
 
 
Net (loss) income
$
(2.4
)
 
$
462.0

Adjustments to reconcile net cash from operating activities:
 
 
 
Depreciation and amortization
397.1

 
406.0

Share-based compensation
16.4

 
31.8

Deferred income taxes
(101.0
)
 
(157.6
)
Gain on divestitures
—

 
(419.1
)
Other non-cash items
(19.0
)
 
32.4

Changes in assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable, net
(21.8
)
 
(52.6
)
Inventories
18.4

 
(8.5
)
Accounts payable
2.1

 
(10.7
)
Income taxes
7.4

 
12.5

Other
(35.4
)
 
(73.7
)
Net cash from operating activities
261.8

 
222.5

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(67.1
)
 
(101.6
)
Acquisitions, net of cash acquired
(699.9
)
 
—

Proceeds from divestitures, net of cash
298.3

 
576.9

Other
12.4

 
(9.9
)
Net cash from investing activities
(456.3
)
 
465.4

Cash Flows From Financing Activities:
 
 
 
Issuance of external debt
657.2

 
40.0

Repayment of external debt and capital lease obligation
(1,392.8
)
 
(332.8
)
Debt financing costs
(12.0
)
 
(13.0
)
Proceeds from exercise of share options
—

 
3.9

Repurchase of shares
(56.8
)
 
(380.8
)
Other
(24.9
)
 
(19.5
)
Net cash from financing activities
(829.3
)
 
(702.2
)
Effect of currency rate changes on cash
(1.2
)
 
1.6

Net change in cash, cash equivalents and restricted cash
(1,025.0
)
 
(12.7
)
Cash, cash equivalents and restricted cash at beginning of period
1,279.1

 
361.1

Cash, cash equivalents and restricted cash at end of period
$
254.1

 
$
348.4

 
 
 
 
Cash and cash equivalents at end of period
$
235.7

 
$
330.2

Restricted cash included in other assets at end of period
18.4

 
18.2

Cash, cash equivalents and restricted cash at end of period
$
254.1

 
$
348.4


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 Loss
 
Total
Shareholders'
Equity
 
Number
 
Par
 Value
 
Number
 
Amount
 
 
Balance at December 29, 2017
92.2

 
$
18.4

 
5.9

 
$
(1,564.7
)
 
$
5,492.6

 
$
2,588.6

 
$
(12.9
)
 
$
6,522.0

Impact of accounting standard adoptions, net of tax
—

 
—

 
—

 
—

 
—

 
2.6

 
(1.5
)
 
1.1

Net loss
—

 
—

 
—

 
—

 
—

 
(2.4
)
 
—

 
(2.4
)
Currency translation adjustments
—

 
—

 
—

 
—

 
—

 
—

 
(7.3
)
 
(7.3
)
Change in derivatives, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
0.5

 
0.5

Change in benefit plans, net of tax
—

 
—

 
—

 
—

 
—

 
—

 
(0.5
)
 
(0.5
)
Vesting of restricted shares
0.3

 
0.1

 
0.1

 
(1.6
)
 
(0.1
)
 
—

 
—

 
(1.6
)
Share-based compensation
—

 
—

 
—

 
—

 
16.4

 
—

 
—

 
16.4

Reissuance of treasury shares
—

 
—

 
(0.1
)
 
2.4

 
—

 
(1.0
)
 
—

 
1.4

Repurchase of shares
—

 
—

 
3.6

 
(55.2
)
 
—

 
—

 
—

 
(55.2
)
Balance at June 29, 2018
92.5

 
$
18.5

 
9.5

 
$
(1,619.1
)
 
$
5,508.9

 
$
2,587.8

 
$
(21.7
)
 
$
6,474.4

 
See Notes to Condensed Consolidated Financial Statements.


6



MALLINCKRODT PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited, dollars in millions, except share data, 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 business that develops, manufactures, markets and distributes specialty pharmaceutical products and therapies.
On February 22, 2018, the Company's Board of Directors authorized commencement of a process to dispose of (1) its Specialty Generics business comprised of the previously reported Specialty Generics segment, with the exception of BioVectra, Inc. - a wholly-owned subsidiary of the Company that operates a contract manufacturing business in Canada ("BioVectra"), (2) certain of its non-promoted brands business, which was previously reflected in the Specialty Brands segment; and (3) its ongoing, post-divestiture supply agreement with the acquirer of the contrast media and delivery systems (CMDS) business, which was previously reflected in the Other non-operating segment (referred to collectively as the "Specialty Generics Disposal Group"). The Company evaluated the criteria prescribed by United States ("U.S.") Generally Accepted Accounting Principles ("GAAP") for recording a disposal group as held for sale and discontinued operations. This criteria was met during the three months ended March 30, 2018, and as a result, prior year balances have been recast to present the financial results of the disposal group as a discontinued operation.
As the Specialty Generics Disposal Group is reported as a discontinued operation, the Company's continuing operations are limited to the results of operations from the Specialty Brands segment. The Specialty Brands segment markets branded pharmaceutical products for autoimmune and rare disease in the specialty areas of neurology, rheumatology, nephrology, ophthalmology and pulmonology; immunotherapy and neonatal respiratory critical care therapies, analgesics and gastrointestinal products. The Company's diversified, in-line portfolio of both marketed and development products is focused on patients with significant unmet medical needs.
The Company owns or has rights to use the trademarks and trade names that are used in conjunction with the operation of its business. One of the more important trademarks that the Company owns or has rights to use that appears in this Quarterly Report on Form 10-Q is "Mallinckrodt," which is a registered trademark or the subject of pending trademark applications in the U.S. and other jurisdictions. Solely for convenience, the Company only uses the ™ or ® symbols the first time any trademark or trade name is mentioned in the following notes. Such references are not intended to indicate in any way that the Company will not assert, to the fullest extent permitted under applicable law, its rights to its trademarks and trade names. Each trademark or trade name of any other company appearing in the following notes is, to the Company's knowledge, owned by such other company.

Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in U.S. dollars and in accordance with GAAP. The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and entities in which they own or control more than 50% of the voting shares, or have the ability to control through similar rights. All intercompany balances and transactions have been eliminated in consolidation and all normal recurring adjustments necessary for a fair presentation have been included in the results reported. The results of entities disposed of are included in the unaudited condensed consolidated financial statements up to the date of disposal, and where appropriate, these operations have been reported in discontinued operations. Divestitures of product lines and businesses not meeting the criteria for discontinued operations have been reflected in operating income. The fiscal year end balance sheet data was derived from audited consolidated financial statements, but do not include all of the annual disclosures required by GAAP; accordingly these unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements included in its Annual Report on Form 10-K for the period ended December 29, 2017 filed with the Securities and Exchange Commission ("SEC") on February 27, 2018.

Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of December. Unless otherwise indicated, the three and six months ended June 29, 2018 refers to the thirteen and twenty-six week periods ended June 29, 2018 and the three and six months ended June 30, 2017 refers to the thirteen and twenty-six week periods ended June 30, 2017.


7



2.
Recently Issued Accounting Standards
Adopted
The Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update)," in March 2018. This update adds SEC paragraphs pursuant to the SEC's Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act ("TCJA") that was enacted in December 2017. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete their accounting for the tax effects of the TCJA. The amendments are effective upon addition to the FASB Accounting Standards Codification ("ASC"). The Company adopted this guidance in fiscal 2018. See Note 7 for additional details of the Company's assessment of impact of this adoption.
The FASB issued ASU 2017-09, "Compensation - Stock Compensation: Scope of Modification Accounting," in May 2017. Under the new guidance, the effects of a modification should be accounted for unless all of the following are met: (1) the fair value or calculated intrinsic value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. The Company adopted this standard in fiscal 2018 and will apply this standard to prospective modifications. The adoption of this guidance did not result in any material changes to the unaudited condensed consolidated financial statements.
The FASB issued ASU 2017-07, "Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost," in March 2017. This update requires that the service cost component be disaggregated from the other components of net benefit cost. Service cost should be reported in the same line item or items as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost should be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. The Company adopted this guidance in fiscal 2018 which required retroactive application resulting in the reclassification of $72.3 million of other components of net benefit costs to other (expense) income, net for the six months ended June 30, 2017 from selling, general and administrative expenses ("SG&A") of $70.7 million, cost of sales of $1.2 million, and research and development expenses ("R&D") of $0.4 million. The adoption of this guidance did not result in any material changes to the unaudited condensed consolidated financial statements.
The FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," in January 2017. This update provides a screen to determine whether or not a set of assets is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the amendments in this update (1) require that to be considered a business, a set of assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The Company adopted this guidance in fiscal 2018, which did not have a material impact to the unaudited condensed consolidated financial statements.
The FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," in January 2016. This update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Under the new guidance, equity investments, other than equity method investments, are to be measured at fair value with changes in fair value recognized through net income. The Company adopted this guidance in fiscal 2018, resulting in a $1.5 million increase to beginning retained earnings with an offsetting decrease to accumulated other comprehensive loss ("AOCI") relating to the unrealized gain on its investment in Mesoblast Limited ("Mesoblast"). The adoption of this standard did not result in any material changes to the unaudited condensed consolidated financial statements.

The 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(s); (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract(s); and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The FASB subsequently issued additional ASUs to clarify the guidance in ASU 2014-09. The additional ASUs issued include ASU 2016-08, "Revenue from Contracts with Customers;" ASU 2016-10 "Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing;" and ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients."


8



The Company adopted ASU 2014-09 and its related amendments (collectively known as "ASC 606") effective on December 30, 2017 using the modified retrospective transition approach. The adoption of ASC 606 represents a change in accounting principle that more closely aligns revenue recognition with the delivery of the Company's products and will provide financial statement readers with enhanced disclosures, which have been included in Note 3. The cumulative effect of applying the new standard to contracts not completed at December 30, 2017 was recorded as a $1.1 million increase, net of tax, to beginning retained earnings. The prior periods were not restated. The adoption of this standard did not result in any material changes to the unaudited condensed consolidated financial statements.

Not Yet Adopted
The FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income," in February 2018. This update allows a reclassification from AOCI to retained earnings for the tax effects resulting from TCJA that are stranded in AOCI. This guidance is effective for the Company in the first quarter of fiscal 2019. The Company expects the impact of this guidance to be immaterial to its unaudited condensed consolidated financial statements upon adoption.
The FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," in August 2017. This update simplifies the application of hedge accounting and enhances the economics of the entity's risk management activities in its financial statements. The update amends the guidance on designation and measurement for qualifying hedging relationships requiring the application of a modified retrospective approach on the date of adoption. This guidance is effective for the Company in the first quarter of fiscal 2019. The Company expects the impact of this guidance to be immaterial to its unaudited condensed consolidated financial statements upon adoption.
The FASB issued ASU 2016-02, "Leases," in February 2016. This update was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of 12 months) on the balance sheet as a lease liability and a right-of-use asset (as defined under ASU 2016-02). This guidance is effective for the Company in the first quarter of fiscal 2019. The Company has identified its population of lease agreements and is currently assessing other arrangements such as supply and service agreements for embedded leases. Although the Company is in process of determining the potential impact on its consolidated financial statements, it anticipates that the most significant change will be related to the Company recording additional assets and corresponding liabilities on the balance sheet for operating leases. The ultimate impact of the new standard will depend on the total amount of the Company's lease commitments as of the adoption date.

3.
Revenue from Contracts with Customers
Product Sales Revenue

The Company sells its products through distributors who resell the products to institutions and end user customers, while certain products are sold and distributed directly to hospitals. The Company also enters into arrangements with indirect customers, such as health care providers and payers, to establish contract pricing for certain products that provides for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of the Company's products.
 
Reserves for variable consideration
 
Product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration for which reserves are established. These reserves result from estimated chargebacks, rebates, product returns and other sales deductions that are offered within contracts between the Company and its customers, health care providers and payers relating to the Company's sales of its products. These reserves are based on the amounts earned or to be claimed on the related sales and are classified as reductions of accounts receivable (if the amount is payable to the customer) or a current liability (if the amount is payable to a party other than a customer). Where appropriate, these estimates take into consideration a range of possible outcomes which are probability-weighted for relevant factors such as the Company's historical experience, estimated future trends, estimated customer inventory levels, current contracted sales terms with customers, level of utilization of the Company's products and other competitive factors. Overall, these reserves reflect the Company's best estimates of the amount of consideration to which it is entitled based on the terms of the contract. The amount of variable consideration included in the transaction price may be constrained (reduced), and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company adjusts reserves for chargebacks, rebates, product returns and other sales deductions to reflect differences between estimated and actual experience. Such adjustments impact the amount of net sales recognized in the period of adjustment.  


9



The following table reflects activity in the Company's sales reserve accounts, on a continuing operations basis:
 
Rebates and Chargebacks
 
Product Returns
 
Other Sales Deductions
 
Total
Balance at December 29, 2017
$
60.3

 
$
4.1

 
$
1.1

 
$
65.5

Provisions
147.7

 
4.1

 
4.9

 
156.7

Payments or credits
(119.5
)
 
(4.6
)
 
(4.7
)
 
(128.8
)
Balance at June 29, 2018
$
88.5

 
$
3.6

 
$
1.3

 
$
93.4


 See Note 19 for presentation of the Company's net sales by product family.

Product sales are recognized when the customer obtains control of the Company's product. Control is transferred either at a point in time, generally upon delivery to the customer site, or in the case of certain of the Company's hospital products, over the period in which the customer has access to the product and related services. Revenue recognized over time is based upon either consumption of the product or passage of time based upon the Company's determination of the measure that best aligns with how the obligation is satisfied. The Company's considerations of why such measures provide a faithful depiction of the transfer of its products are as follows:

•
For those contracts whereby revenue is recognized over time based upon consumption of the product, the Company either has:
1)
the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, for which the practical expedient to recognize revenue in proportion to the amount it has the right to invoice has been applied, or
2)
the remaining goods and services to which the customer is entitled is diminished upon consumption.

•
For those contracts whereby revenue is recognized over time based upon the passage of time, the benefit that the customer receives from unlimited access to the Company's product does not vary, regardless of consumption. As a result, the Company's obligation diminishes with the passage of time; therefore, it was determined that ratable recognition of the transaction price over the contract period is the measure that best aligns with how the obligation is satisfied.

Product sales transferred to customers at a point in time and over time are as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 29,
2018
Product sales transferred at a point in time
79.1
%
 
77.3
%
Product sales transferred over time
20.9
%
 
22.7
%

Transaction price allocated to the remaining performance obligations

The majority of the Company's contracts (as defined under ASC 606) are less than one year; therefore, the related disclosure of the amount of transaction price allocated to the performance obligations that are unsatisfied at period end has been omitted, with the exception of those noted below. The following table includes estimated revenue from certain of the Company's hospital products that are expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at June 29, 2018:
Remainder of Fiscal 2018
$
63.9

Fiscal 2019
119.4

Fiscal 2020
101.8

Fiscal 2021
14.2


Costs to obtain a contract

As the majority of the Company's contracts are short term in nature, sales commissions are generally expensed when incurred as the amortization period would have been less than one year. These costs are recorded within SG&A expenses. For contracts that extend beyond one year, the incremental expense recognition matches the recognition of related revenue and therefore, no costs to obtain a contract were capitalized upon adoption of ASC 606.


10



Costs to fulfill a contract

The Company capitalizes the costs associated with the devices used in the Company's portfolio of hospital drug-device combination products, which are used in satisfying future performance obligations. Capital expenditures for these devices represent cash outflows for the Company's cost to produce the asset, which is classified in property, plant and equipment, net on the unaudited condensed consolidated balance sheet and expensed to cost of sales over the useful life of the equipment. As of June 29, 2018, the total net book value of these devices was $27.9 million. The associated depreciation expense recognized during the six months ended June 29, 2018 was $6.8 million.

Product Royalty Revenues
 
In relation to the Company's acquisition of Sucampo Pharmaceuticals, Inc. on February 13, 2018, as discussed in further detail in Note 5, it acquired an arrangement under which the Company licenses certain rights to Amitiza® (lubiprostone) ("Amitiza") to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur. The associated royalty revenue recognized during the three and six months ended June 29, 2018 was $21.6 million and $29.6 million, respectively.

Contract Balances

Accounts receivable are recorded when the right to consideration becomes unconditional. Payments received from customers are typically based upon payment terms of 30 days. The Company does not maintain contract asset balances aside from the accounts receivable balance presented on the unaudited condensed consolidated balance sheet as costs to obtain a contract are expensed when incurred and the amortization period would have been less than one year. These costs are recorded within SG&A expenses.
Contract liabilities are recorded when cash payments are received in advance of the Company's performance, including amounts which are refundable. Contract liabilities as of June 29, 2018 and December 29, 2017 were as follows:
 
June 29,
2018
 
December 29,
2017
Accrued and other current liabilities
$
20.2

 
$
13.9

Other liabilities
5.2

 
6.3

Contract liabilities
$
25.4

 
$
20.2

Revenue recognized during the six months ended June 29, 2018 from amounts included in contract liabilities at the beginning of the period was approximately $14.6 million.

4.
Discontinued Operations and Divestitures
Discontinued Operations
Specialty Generics Disposal Group: On February 22, 2018, the Specialty Generics Disposal Group met the criteria for held for sale classification and discontinued operation presentation upon commencement of a process to dispose of the group.

11



The following table summarizes the financial results of the Specialty Generics Disposal Group presented in the unaudited condensed consolidated statements of income:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Major line items constituting income from discontinued operations
 
 
 
 
 
 
 
Net sales
$
193.8

 
$
224.4

 
$
376.5

 
$
475.3

Cost of sales
116.8

 
128.0

 
228.8

 
259.2

Selling, general and administrative expenses
25.6

 
16.2

 
44.4

 
37.3

Research and development expenses
11.3

 
16.9

 
29.2

 
33.7

Restructuring charges, net
0.1

 
—

 
5.2

 
6.9

Other income, net
0.3

 
2.4

 
0.3

 
3.8

Income from discontinued operations
40.3

 
65.7

 
69.2

 
142.0

Income tax expense
9.0

 
13.5

 
15.8

 
16.0

Income from discontinued operations, net of income taxes
$
31.3

 
$
52.2

 
$
53.4

 
$
126.0


The following table summarizes the assets and liabilities of the Specialty Generics Disposal Group that are classified as held for sale on the unaudited condensed consolidated balance sheets:
 
June 29,
2018
 
December 29, 2017
Carrying amounts of major classes of assets included as part of discontinued operations
 
 
 
Accounts receivable
$
164.7

 
$
170.4

Inventories
202.1

 
211.7

Property, plant and equipment, net
558.6

 
553.6

Intangible assets, net
112.3

 
114.0

Other current and non-current assets
74.8

 
84.5

Total assets classified as held for sale in the balance sheet
$
1,112.5

 
$
1,134.2

 
 
 
 
Carrying amounts of major classes of liabilities included as part of discontinued operations
 
 
 
Accounts payable
$
40.0

 
$
36.0

Other current and non-current liabilities
130.6

 
126.6

Total liabilities classified as held for sale in the balance sheet
$
170.6

 
$
162.6


The following table summarizes significant cash and non-cash transactions of the Specialty Generics Disposal Group that are included within the unaudited condensed consolidated statements of cash flows for the respective periods:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Depreciation, including accelerated depreciation
$
2.6

 
$
14.9

 
$
11.5

 
$
30.4

Amortization
—

 
5.4

 
1.7

 
10.7

Capital expenditures
7.1

 
14.3

 
15.8

 
30.6

All other notes to the unaudited condensed consolidated financial statements that were impacted by this discontinued operation have been reclassified accordingly.

Nuclear Imaging: On January 27, 2017, the Company completed the sale of its Nuclear Imaging business to IBA Molecular ("IBAM") for approximately $690.0 million before tax impacts, including up-front consideration of approximately $574.0 million, up to $77.0 million of contingent consideration and the assumption of certain liabilities. The Company recorded a pre-tax gain on the sale of the Nuclear Imaging business of $363.4 million during the six months ended June 30, 2017, which excluded any potential proceeds

12



from the contingent consideration and reflects a charge of $5.9 million during the three months ended June 30, 2017 primarily as a result of ongoing working capital adjustments associated with the purchase agreement. During the three months ended June 29, 2018 the Company received a total of $15.0 million in contingent consideration related to the sale of the Nuclear Imaging business, consisting of a $6.0 million cash payment and the issuance of $9.0 million par value non-voting preferred equity certificates. The preferred equity certificates accrue interest at a rate of 10.0% per annum and are redeemable on the retirement date of July 27, 2025, or earlier if elected by the issuer, for cash at a price equal to the par value and any accrued but unpaid interest. The Company recorded a tax expense of $1.5 million associated with the $6.0 million contingent consideration cash payment. The $9.0 million in preferred equity certificates is presented as a non-cash investing activity on the unaudited condensed consolidated statement of cash flows. The $13.5 million of contingent consideration received, net of tax, was recorded as income from discontinued operations.
The following table summarizes the financial results of the Nuclear Imaging business presented in the unaudited condensed consolidated statements of income:
 
Three months ended
 
Six months ended
 
June 30,
2017
 
June 30,
2017
Major line items constituting income from discontinued operations
 
 
 
Net sales
$
—

 
$
31.6

Cost of sales
—

 
15.6

Selling, general and administrative expenses
—

 
7.8

Other
—

 
(0.2
)
Income from discontinued operations
—

 
8.4

(Loss) gain on divestiture of discontinued operations
(5.9
)
 
363.4

(Loss) income from discontinued operations, before income taxes
(5.9
)
 
371.8

Income tax (benefit) expense
(0.1
)
 
5.3

(Loss) income from discontinued operations, net of income taxes
$
(5.8
)
 
$
366.5

During the three months ended June 30, 2017, there was income tax benefit of $0.1 million associated with the $5.9 million loss recognized on divestiture. During the six months ended June 30, 2017, there was income tax expense of $1.0 million associated with the $363.4 million gain on divestiture and a $4.3 million income tax expense associated with the $8.4 million income from discontinued operations. The tax impact of the gain recognized on divestiture was favorably impacted by a benefit from permanently deductible items.
The Company incurred $0.3 million of capital expenditures related to the Nuclear Imaging business that are included within the unaudited condensed consolidated statements of cash flows for the six months ended June 30, 2017.
All other notes to the unaudited condensed consolidated financial statements that were impacted by this discontinued operation have been reclassified accordingly.

Divestitures
PreveLeak/Recothrom: On March 16, 2018, the Company completed the sale of a portion of its Hemostasis business, inclusive of its PreveLeak™ Surgical Sealant ("PreveLeak") and RECOTHROM® Thrombin topical (Recombinant) ("Recothrom") products to Baxter International, Inc. ("Baxter") for approximately $185.0 million, with a base payment of $153.0 million, inclusive of existing inventory and subject to a closing inventory adjustment, with the remainder in potential future milestones. Baxter assumed other expenses, including contingent liabilities associated with PreveLeak. During the six months ended June 29, 2018, the Company recorded a pre-tax gain on the sale of less than $0.1 million, which excluded any potential proceeds from the attainment of future milestones and reflected a post-sale closing inventory adjustment of $14.3 million. The financial results of the PreveLeak and Recothrom operations are presented within continuing operations as this divestiture did not meet the criteria for discontinued operations presentation.
As part of the divestiture and calculation of the gain, the Company wrote off intangible assets of $49.9 million and goodwill of $51.5 million, from the Specialty Brands segment, ascribed to the PreveLeak and Recothrom operations. The remaining items included in the gain calculation are primarily attributable to inventory transferred, contingent consideration transferred and transaction costs incurred by the Company.
Intrathecal Therapy: On March 17, 2017, the Company completed the sale of its Intrathecal Therapy business to Piramal Enterprises Limited's subsidiary in the United Kingdom ("U.K."), Piramal Critical Care ("Piramal"), for approximately $203.0 million, including fixed consideration of $171.0 million and contingent consideration of up to $32.0 million. The $171.0 million of fixed

13



consideration consisted of $17.0 million received at closing and a $154.0 million note receivable that was due one year from the transaction closing date. During the six months ended June 30, 2017, the Company recorded a pre-tax gain on the sale of the business of $57.0 million, which excluded any potential proceeds from the contingent consideration and reflects a post-sale adjustment of $2.1 million during the three months ended June 30, 2017. On February 28, 2018, the Company received $154.0 million from Piramal for the settlement of the aforementioned note receivable. The financial results of the Intrathecal Therapy business are presented within continuing operations as this divestiture did not meet the criteria for discontinued operations presentation.
As part of the divestiture and calculation of the gain, the Company wrote off intangible assets of $48.7 million and goodwill of $49.8 million, from the Specialty Brands segment, ascribed to the Intrathecal Therapy business. The Company is committed to reimburse up to $7.3 million of product development expenses incurred by Piramal, of which $3.2 million was included in accrued and other current liabilities on the unaudited condensed consolidated balance sheet as of June 29, 2018. The remaining items included in the gain calculation are attributable to inventory transferred and transaction costs incurred by the Company.

5.
Acquisitions
Sucampo Pharmaceuticals, Inc.
On February 13, 2018, the Company acquired Sucampo Pharmaceuticals, Inc. ("Sucampo") through the acquisition of all the outstanding common stock of Sucampo. Consideration for the transaction consisted of approximately $1.2 billion, including the assumption of Sucampo's third-party debt ("the Sucampo Acquisition"). The acquisition was funded through the issuance of $600.0 million aggregate principal amount of senior secured notes, a $900.0 million borrowing under the Company's revolving credit facility, as discussed further in Note 12, and cash on hand. Sucampo's commercialized products include Amitiza, a leading global product in the branded constipation market, and Rescula® (unoprostone isopropyl ophthalmic solution) 0.15% ("Rescula"), which is indicated for ocular hypertension and open-angle glaucoma, and marketed in Japan. Through this acquisition, the Company acquired VTS-270, a Phase 3 development product for Niemann-Pick Type C, a rare, neurodegenerative and ultimately fatal disease that can present at any age. Also acquired was a collaborative agreement with Cancer Prevention Pharmaceuticals ("CPP") associated with the development of CPP-1X/sulindac, a Phase 3 development product for Familial Adenomatous Polyposis ("FAP").
Upon completion of the Sucampo Acquisition, Sucampo's 3.25% convertible senior notes due 2021 ("the Sucampo Notes") became eligible to receive increased consideration in conjunction with a make-whole fundamental change, such that each $1,000 principal face amount of Sucampo Notes could be converted into $1,221 cash. As of June 29, 2018, the issued convertible debt of $300.0 million had been converted and paid in full by the Company.

Fair value allocation
The following amounts represent the preliminary allocations of the fair value of the identifiable assets acquired and liabilities assumed for the Sucampo 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 acquisition. 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.
Cash and cash equivalents
$
149.6

Accounts receivable
35.7

Inventory
153.2

Intangible assets
919.5

Goodwill
246.0

Other current and non-current assets
25.6

Total assets acquired
1,529.6

Current liabilities
108.2

Deferred tax liabilities, net (non-current)
170.8

Debt
366.3

Other noncurrent liabilities
36.7

Total liabilities assumed
682.0

Net assets acquired
$
847.6



14



The following is a reconciliation of the total consideration to net assets acquired:
Total consideration, net of cash
$
698.0

Plus: cash assumed in acquisition
149.6

Total consideration/net assets acquired
$
847.6


Intangible assets acquired consist of the following:
 
 
Amount
 
Amortization Period
 
Discount Rate
Completed technology - Amitiza
 
$
634.0

 
9 years
 
14.0%
Completed technology - Rescula
 
11.0

 
8 years
 
14.0%
In-process research and development - VTS-270
 
274.5

 
Non-Amortizable
 
15.0%
The fair value of the completed technology and in-process research and development ("IPR&D") was determined using the income approach, which is a valuation technique that provides an estimate of fair value of the assets based on the market participant expectations of cash flows the asset would generate. The cash flows were discounted commensurate with the level of risk associated with each asset or its projected cash flows. The discount rates were developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the U.S. Food and Drug Administration ("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 future product development, the assembled workforce, 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 loss included in the Company's results for the periods presented were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Net sales
$
49.6

 
$
—

 
$
73.8

 
$
—

Operating loss
(37.0
)
 
—

 
(67.7
)
 
—



The following was included within cost of sales for the periods presented:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Intangible asset amortization
$
17.9

 
$
—

 
$
27.0

 
$
—

Inventory fair value step-up expense
31.5

 
—

 
46.5

 
—


Acquisition-related costs incurred for the acquisition of $2.7 million were recognized during the six months ended June 29, 2018.

Licenses
On April 5, 2018 (the "Exercise Date"), the Company exercised the option under its collaborative agreement with CPP to negotiate terms of an exclusive license to commercialize CPP-1X/sulindac in North America. In addition, the Company provided CPP with a $10.0 million upfront R&D payment for expenses related to the FAP pivotal trial incurred during the "Negotiation Period," or the period from the Exercise Date through the execution of such license agreement, which shall not exceed 120 days. CPP shall return to the Company any portion of the R&D payment that is not utilized during the Negotiation Period. Of the $10.0 million upfront payment, $6.3 million was utilized during the three months ended June 29, 2018 and recorded as R&D expense within the condensed consolidated statement of income. The remaining $3.7 million was included in prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet as of June 29, 2018. See Note 21 for discussion of the license agreement entered into with CPP subsequent to the date of this report.



15



6.
Restructuring and Related Charges
In July 2016, the Company's Board of Directors approved a $100.0 million to $125.0 million restructuring program ("the 2016 Mallinckrodt Program") designed to further improve the Company's cost structure as it continues to transform the business. The 2016 Mallinckrodt Program is expected to include actions across both the Specialty Brands segment and the Specialty Generics Disposal Group, as well as within corporate functions. There is no specified time period associated with the 2016 Mallinckrodt Program.
In February 2018, the Company's Board of Directors approved a $100.0 million to $125.0 million restructuring program ("the 2018 Mallinckrodt Program") that is of similar design as the 2016 Mallinckrodt Program. The utilization of the 2018 Mallinckrodt Program will commence upon completion of the 2016 Mallinckrodt Program. There is no specified time period associated with the 2018 Mallinckrodt Program.
In addition to the 2016 and 2018 Mallinckrodt Programs, the Company takes certain restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges reflected in continuing operations by segment are as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Specialty Brands
$
53.4

 
$
0.3

 
$
70.5

 
$
9.5

Corporate
5.3

 
0.7

 
11.3

 
2.8

Restructuring and related charges, net
58.7

 
1.0

 
81.8

 
12.3

Less: accelerated depreciation
—

 
(0.4
)
 
—

 
(1.4
)
Restructuring charges, net
$
58.7

 
$
0.6

 
$
81.8

 
$
10.9


Net restructuring and related charges reflected in continuing operations by program are comprised of the following:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
2016 Mallinckrodt Program
$
52.3

 
$
1.0

 
$
55.4

 
$
12.3

Acquisition programs
6.4

 
—

 
26.4

 
—

Total
58.7

 
1.0

 
81.8

 
12.3

Less: accelerated depreciation
—

 
(0.4
)
 
—

 
(1.4
)
Total charges expected to be settled in cash
$
58.7

 
$
0.6

 
$
81.8

 
$
10.9


The following table summarizes cash activity for restructuring reserves reflected in continuing operations, substantially all of which are related to contract termination costs and employee severance and benefits:
 
2016 Mallinckrodt Program
 
Acquisition Programs
 
Total
Balance at December 29, 2017
$
14.1

 
$
0.8

 
$
14.9

Charges
56.8

 
26.8

 
83.6

Changes in estimate
(1.4
)
 
(0.4
)
 
(1.8
)
Cash payments
(8.1
)
 
(17.8
)
 
(25.9
)
Balance at June 29, 2018
$
61.4

 
$
9.4

 
$
70.8



16



Total Company net restructuring and related charges, including associated asset impairments, incurred cumulative-to-date related to the 2016 Mallinckrodt Program was as follows:
 
2016 Mallinckrodt Program
Specialty Brands
$
80.0

Corporate
16.9

Specialty Generics Disposal Group
14.3

 
$
111.2

On January 8, 2018, the Company announced that it would discontinue marketing of Raplixa® after an evaluation of strategic options. During the three months ended June 29, 2018, the Company incurred restructuring expenses of $48.1 million under the 2016 Mallinckrodt Program, consisting primarily of contract termination costs related to the production of Raplixa. Amounts paid in the future may differ from the amount currently recorded.
All of the restructuring reserves were included in accrued and other current liabilities on the Company's unaudited condensed consolidated balance sheets.

7.
Income Taxes
The Company recognized an income tax benefit of $53.4 million on a loss from continuing operations before income taxes of $81.5 million for the three months ended June 29, 2018, and an income tax benefit of $53.6 million on a loss from continuing operations before income taxes of $35.2 million for the three months ended June 30, 2017. This resulted in effective tax rates of 65.5% and 152.3% for the three months ended June 29, 2018 and June 30, 2017, respectively. The income tax benefit for the three months ended June 29, 2018 is comprised of $9.5 million of current tax expense and $62.9 million of deferred tax benefit which is predominantly related to acquired intangible assets. The income tax benefit for the three months ended June 30, 2017 is comprised of $33.9 million of current tax expense and $87.5 million of deferred tax benefit which is predominantly related to acquired intangible assets.
The Company recognized an income tax benefit of $96.8 million on a loss from continuing operations before income taxes of $167.9 million for the six months ended June 29, 2018, and an income tax benefit of $95.6 million on a loss from continuing operations before income taxes of $122.1 million for the six months ended June 30, 2017. This resulted in effective tax rates of 57.7% and 78.3% for the six months ended June 29, 2018 and June 30, 2017, respectively. The income tax benefit for the six months ended June 29, 2018 is comprised of $13.1 million of current tax expense and $109.9 million of deferred tax benefit which is predominantly related to acquired intangible assets. The income tax benefit for the six months ended June 30, 2017 is comprised of $67.8 million of current tax expense and $163.4 million of deferred tax benefit. The net deferred tax benefit of $163.4 million includes $190.6 million of deferred tax benefit, which is predominantly related to acquired intangible assets offset by $27.2 million of deferred tax expense related to utilization of tax attributes.
The income tax benefit was $53.4 million for the three months ended June 29, 2018, compared with a tax benefit of $53.6 million for the three months ended June 30, 2017. The $0.2 million net decrease in the tax benefit includes a decrease of $9.8 million attributable to U.S. Tax Reform; partially offset by an increase of $6.0 million attributable to changes in the amount and jurisdictional mix of operating income and an increase of $3.6 million attributable to the impact of acquisitions occurring since June 30, 2017.
The income tax benefit was $96.8 million for the six months ended June 29, 2018, compared with a tax benefit of $95.6 million for the six months ended June 30, 2017. The $1.2 million net increase in the tax benefit includes an increase of $31.2 million attributable to the impact of dispositions, an increase of $12.8 million attributable to changes in the amount and jurisdictional mix of operating income, and an increase of $8.1 million attributable to the impact of acquisitions occurring since June 30, 2017; partially offset by a decrease of $33.4 million attributable to U.S. Tax Reform and a decrease of $17.5 million attributable to the termination of the defined benefit pension plans which occurred during the six months ended June 30, 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA reduces the U.S. federal corporate statutory rate from 35% to 21%, requires companies to pay a one-time transition tax on certain undistributed earnings of the Company's foreign subsidiaries of U.S. entities and creates new taxes on certain foreign sourced earnings. The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the TCJA. At June 29, 2018, the Company has not completed its accounting for all of the tax effects of the TCJA. As discussed below, the Company has recorded provisional estimates for certain provisions where the accounting is incomplete but a reasonable estimate can be made. In other cases, the Company continues to evaluate certain portions of the TCJA and the application of ASC 740 and no adjustments have been made in the unaudited condensed consolidated financial statements. In all cases, the Company will continue to make and refine

17



its calculations as additional analysis is completed. These estimates may also be affected as the Company gains a more thorough understanding of the tax law.
In fiscal 2017, the Company adjusted certain U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. A provisional decrease of $444.8 million was recognized resulting in a corresponding deferred income tax benefit in fiscal 2017. For the six months ended June 29, 2018, no adjustments related to this provisional estimate were made. While the Company is able to make a reasonable estimate of the impact of the reduction in the U.S. federal corporate statutory tax rate, it may be affected by other analyses related to the TCJA. These analyses include having a U.S. tax return year that straddles the effective date of the statutory rate change and that is different than the Company's fiscal year, the calculation of deemed repatriation of deferred foreign income, and the state tax effect of adjustments made to federal temporary differences.
The one-time transition tax under the TCJA is based upon the amount of post-1986 cumulative undistributed earnings of certain of the Company's subsidiaries which was deferred from U.S. income tax under previous U.S. law. In fiscal 2017, the Company estimated this item would not result in any current or future tax. For the six months ended June 29, 2018, no adjustments related to this provisional estimate have been made. While the Company is able to make a reasonable estimate of the impact of the one-time transition tax, additional information will continue to be gathered to finalize this conclusion.
Because of the complexity and uncertainties of the new global intangible low-taxed income rules, the Company continues to evaluate this portion of the TCJA and the application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to global intangible low-taxed income as a current-period expense when incurred or (2) factoring such amounts into a company's measurement of its deferred taxes. The Company's selection of an accounting policy with respect to these new tax rules will depend on whether it expects to have future U.S. inclusions in taxable income related to global intangible low-taxed income and, if so, what the tax impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income depends on not only the Company's current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or business. While the Company estimates these rules will not have a material tax impact, it is not yet able to finalize the effect of this portion of the TCJA. Therefore, the Company has not made any adjustments related to this item in its unaudited condensed consolidated financial statements and has not made a policy decision regarding whether to record deferred taxes on global intangible low-taxed income.
During the six months ended June 29, 2018, and the fiscal year ended December 29, 2017, the net cash payments for income taxes were $13.7 million and $73.4 million, respectively.
During the three and six months ended June 29, 2018, the Company recognized income tax expense of $9.0 million and $15.8 million, respectively, associated with the Specialty Generics Disposal Group, as shown in Note 4.
During the three and six months ended June 29, 2018, the Company received a total of $15.0 million in contingent consideration related to the sale of the Nuclear Imaging business, consisting of a $6.0 million cash payment and the issuance of $9.0 million par value non-voting preferred equity certificates. The Company recorded a tax expense of $1.5 million associated with the $6.0 million contingent consideration cash payment. The consideration received and related tax expense were recorded net as income from discontinued operations.
The Sucampo Acquisition resulted in a net deferred tax liability increase of $170.8 million. Significant components of this increase include $180.5 million of deferred tax liabilities associated with intangible assets and a $24.1 million deferred tax liability associated with inventory step-up. The increase in deferred tax liabilities is partially offset by $28.0 million of deferred tax assets associated with U.S. net operating losses, $2.7 million of deferred tax assets associated with U.S. tax credits, and various other net deferred tax assets of $3.1 million.
The sale of a portion of the Hemostasis business, inclusive of the PreveLeak and Recothrom products, was completed on March 16, 2018. This divestiture resulted in a net deferred tax liability decrease of $3.0 million. A significant component of this decrease includes a decrease of $3.0 million of deferred tax liability associated with inventory step-up. In addition, there was a decrease of $1.5 million of deferred tax asset associated with potential future consideration, a decrease of $2.4 million of deferred tax asset associated with net operating losses, and a decrease of $4.2 million of deferred tax asset associated with intangible assets, all of which were offset by a reduction in valuation allowance of $8.1 million.
The Company's unrecognized tax benefits, excluding interest, totaled $202.9 million at June 29, 2018 and $182.5 million at December 29, 2017. The net increase of $20.4 million primarily resulted from a net increase to current year tax positions of $0.9 million, net increases from prior period tax positions predominately from acquired companies of $19.9 million, and net decreases from settlements of $0.4 million. If favorably settled, $190.2 million of unrecognized tax benefits at June 29, 2018 would benefit the effective tax rate, of which up to $20.0 million may be reported in discontinued operations. The total amount of accrued interest related to these obligations was $17.8 million at June 29, 2018 and $7.1 million at December 29, 2017.

18



It is reasonably possible that within the next twelve months, as a result of the resolution of various U.K. and non-U.K. examinations, appeals and litigation and the expiration of various statutes of limitation, that the unrecognized tax benefits will decrease by up to $39.8 million and the amount of related interest and penalties will decrease by up to $6.6 million.

8.
Earnings per Share
Basic earnings per share is computed by dividing net income (loss) by the number of weighted-average shares outstanding during the period. Diluted earnings per share is computed using the weighted-average shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represent the incremental ordinary shares issuable for restricted share units and share option exercises. The Company calculates the dilutive effect of outstanding restricted share units and share options on earnings per share by application of the treasury stock method. Dilutive securities, including participating securities, are not included in the computation of loss per share when the Company reports a net loss from continuing operations as the impact would be anti-dilutive.
The weighted-average number of shares outstanding used in the computations of basic and diluted earnings per share were as follows (in millions):
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Basic
83.2

 
98.5

 
84.7

 
100.9

Dilutive impact of restricted share units and share options
—

 
0.2

 
—

 
—

Diluted
83.2

 
98.7

 
84.7

 
100.9


The computation of diluted weighted-average shares outstanding for both the three and six months ended June 29, 2018 excludes approximately 3.6 million shares of equity awards because the effect would have been anti-dilutive. The computation of diluted weighted-average shares outstanding for the three and six months ended June 30, 2017 excludes approximately 4.0 million and 3.6 million shares of equity awards, respectively, because the effect would have been anti-dilutive.

9.
Inventories
Inventories were comprised of the following at the end of each period: 
 
June 29,
2018
 
December 29,
2017
Raw materials and supplies
$
26.1

 
$
23.7

Work in process
118.1

 
61.1

Finished goods
40.2

 
43.9

 
$
184.4

 
$
128.7


10.
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 29,
2018
 
December 29, 2017
Property, plant and equipment, gross
$
599.6

 
$
569.7

Less: accumulated depreciation
(169.5
)
 
(156.5
)
Property, plant and equipment, net
$
430.1

 
$
413.2



19



Depreciation expense for property, plant and equipment was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Depreciation expense
$
11.6

 
$
12.5

 
$
23.3

 
$
25.8


11.
Goodwill and Intangible Assets
The gross carrying amount and accumulated impairment of goodwill at the end of each period were as follows:
 
June 29, 2018
 
December 29, 2017
 
Gross Carrying Amount
 
Accumulated Impairment
 
Gross Carrying Amount
 
Accumulated Impairment
Specialty Brands
$
3,676.7

 
$
—

 
$
3,482.7

 
$
—


During the six months ended June 29, 2018, the gross carrying value of goodwill within the Specialty Brands segment increased by $194.0 million. The increase was attributable to the Sucampo Acquisition, which yielded $246.0 million of goodwill, partially offset by $51.5 million of goodwill ascribed to the sale of a portion of the Company's Hemostasis business, inclusive of the PreveLeak and Recothrom products. The remaining change in goodwill was related to purchase accounting adjustments during the twelve month measurement period for previous acquisitions.

Stannsoporfin
On May 3, 2018, in a joint meeting, the FDA's Gastrointestinal Drugs Advisory Committee and Pediatric Advisory Committee (the "Advisory Committee") recommended that the risk benefit profile of the Company's stannsoporfin IPR&D product does not support approval for the treatment of newborns ≥35 weeks of gestational age with indicators of hemolysis who are at risk of developing hyperbilirubinemia (severe jaundice). While the timing of the development program is expected to shift outward, the Company continues to have conversations with the FDA to determine the best path forward. The Prescription Drug User Fee Act ("PDUFA") date for this development product is August 22, 2018. The Company will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated IPR&D asset of $113.5 million included within intangible assets, net on the unaudited condensed consolidated balance sheets as of June 29, 2018 and December 29, 2017. Refer to Note 18 for the associated impact on the Company's contingent consideration liability related to stannsoporfin.
The Company annually tests the indefinite-lived intangible assets for impairment, or whenever events or changes in circumstances indicate that the carrying value may not be recoverable by either a qualitative or income approach.  Management relies on a number of qualitative factors when considering a potential impairment such as changes to planned revenue or earnings that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
The gross carrying amount and accumulated amortization of intangible assets at the end of each period were as follows:
 
June 29, 2018
 
December 29, 2017
 
Gross Carrying Amount
 
Accumulated Amortization
 
Gross Carrying Amount
 
Accumulated Amortization
Amortizable:
 
 
 
 
 
 
 
Completed technology
$
10,278.4

 
$
2,473.7

 
$
9,693.0

 
$
2,126.1

Customer relationships
28.0

 
13.0

 
29.5

 
12.2

Trademarks
75.2

 
12.5

 
75.5

 
10.8

Other
8.6

 
8.6

 
8.6

 
8.6

Total
$
10,390.2

 
$
2,507.8

 
$
9,806.6

 
$
2,157.7

Non-Amortizable:
 
 
 
 
 
 
 
Trademarks
$
35.0

 
 
 
$
35.0

 
 
In-process research and development
851.6

 
 
 
577.1

 
 
Total
$
886.6

 
 
 
$
612.1

 
 


20



Intangible asset amortization expense was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29, 2018
 
June 30, 2017
 
June 29, 2018
 
June 30, 2017
Amortization expense
$
184.3

 
$
169.3

 
$
360.6

 
$
339.1


The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
Remainder of Fiscal 2018
$
368.4

Fiscal 2019
737.1

Fiscal 2020
736.8

Fiscal 2021
736.5

Fiscal 2022
609.6


12.
Debt
Debt was comprised of the following at the end of each period:
 
June 29, 2018
 
December 29, 2017
 
Principal
 
Unamortized Discount and Debt Issuance Costs
 
Principal
 
Unamortized Discount and Debt Issuance Costs
Current maturities of long-term debt:
 
 
 
 
 
 
 
3.50% notes due April 2018
$
—

 
$
—

 
$
300.0

 
$
0.2

Term loan due September 2024
16.4

 
0.2

 
14.0

 
0.3

Term loan due February 2025
6.0

 
0.1

 
—

 
—

ACOA loan due December 2028
0.1

 
—

 
—

 
—

Capital lease obligation and vendor financing agreements
—

 
—

 
0.2

 
—

Total current debt
22.5

 
0.3

 
314.2

 
0.5

Long-term debt:
 
 
 
 
 
 
 
4.875% notes due April 2020
700.0

 
4.5

 
700.0

 
5.7

Variable-rate receivable securitization due July 2020
240.0

 
0.5

 
200.0

 
0.7

9.50% debentures due May 2022
10.4

 
—

 
10.4

 
—

5.75% notes due August 2022
884.0

 
8.5

 
884.0

 
9.5

8.00% debentures due March 2023
4.4

 
—

 
4.4

 
—

4.75% notes due April 2023
500.2

 
3.9

 
526.5

 
4.5

5.625% notes due October 2023
731.4

 
8.8

 
738.0

 
9.7

Term loan due September 2024
1,601.5

 
21.6

 
1,837.2

 
26.7

Term loan due February 2025
592.5

 
11.6

 
—

 
—

5.50% notes due April 2025
692.1

 
8.4

 
692.1

 
9.0

ACOA loan due December 2028
1.6

 
—

 
—

 
—

Revolving credit facility
450.0

 
5.2

 
900.0

 
5.9

Total long-term debt
6,408.1

 
73.0

 
6,492.6

 
71.7

Total debt
$
6,430.6

 
$
73.3

 
$
6,806.8

 
$
72.2


In April 2018, $300.0 million of the Company's 3.50% unsecured, fixed-rate notes matured and were repaid with cash on hand.
In March 2018, BioVectra entered into an agreement with the Atlantic Canada Opportunities Agency ("ACOA") to obtain an interest-free loan of up to $5.0 million Canadian Dollars ("CAD") in exchange for specified investments in Canada. The loan is repayable in equal monthly installments over 10 years starting in January 2019. The Company has the option of prepaying this loan without any penalties. As of June 29, 2018, the outstanding principal under this agreement was approximately $1.7 million.

21



In February 2018, in conjunction with the Sucampo Acquisition, Mallinckrodt International Finance S.A. ("MIFSA") and Mallinckrodt CB LLC ("MCB") issued a $600.0 million senior secured term loan.  The variable-rate loan bears an interest rate of LIBOR plus 300 basis points and was issued with a discount of 25 basis points.  The incremental term loan requires quarterly principal amortization payments in an amount equal to 1.00% of the original principal balance of the incremental term loan, and may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which will commence on June 30, 2018, with the remaining principal balance due on February 24, 2025. The incremental term loan matures on February 24, 2025 under terms generally consistent with the term loan due September 2024.
In January 2018, the Company made a $225.0 million voluntary prepayment on its term loan due September 2024.  In making this payment, the Company satisfied certain obligations included within external debt agreements to reinvest proceeds from the sale of assets and businesses within one year of the respective transaction or use the proceeds to pay down debt. 
As of June 29, 2018, the applicable interest rate and outstanding borrowings on the Company's variable-rate debt instruments were as follows:
 
Applicable interest rate
 
Outstanding borrowings
Term loan due September 2024
5.20
%
 
$
1,617.9

Term loan due February 2025
5.52
%
 
598.5

Variable-rate receivable securitization
2.99
%
 
240.0

Revolving credit facility
4.58
%
 
450.0

As of June 29, 2018, the Company continues to be in full compliance with the provisions and covenants associated with its debt agreements. The Company's debt instruments are further described within the notes to the financial statements included within the Company's Annual Report filed on Form 10-K for the fiscal year ended December 29, 2017.

13.
Retirement Plans
The net periodic benefit cost for the Company's defined benefit pension plans was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 29,
2018
 
June 30,
2017
 
June 29,
2018
 
June 30,
2017
Service cost
$
—

 
$
0.2

 
$
0.1

 
$
1.3

Interest cost
0.1

 
0.4

 
0.3

 
1.6

Expected return on plan assets
—

 
—

 
—

 
(0.8
)
Amortization of net actuarial loss
0.2

 
0.3

 
0.3

 
1.8

Amortization of prior service cost
0.1

 
0.1

 
0.1

 
0.2

Plan settlements
—

 
0.5

 
—

 
69.7

Net periodic benefit cost
$
0.4

 
$
1.5

 
$
0.8

 
$
73.8


The net periodic benefit credit for the Company's postretirement benefit plans was approximately $0.7 million and zero for the three months ended June 29, 2018 and June 30, 2017, respectively, and $1.0 million and zero for the six months ended June 29, 2018 and June 30, 2017, respectively.

Of the net periodic benefit cost for the Company's defined benefit pension plans and postretirement benefit plans, only service costs are included within other employee compensation costs recorded within cost of sales, R&D, and SG&A expenses, while all other components of the net periodic benefit costs are included within other income and expense on the unaudited condensed consolidated statements of income.

Pension Plan Termination
During the six months ended June 30, 2017, the Company completed the third-party settlement of the remaining obligations of six defined benefit pension plans that were terminated during fiscal 2016. In conjunction with this final settlement, the Company made a $61.3 million cash contribution to the terminated plans and recognized a $69.7 million charge, included within other (expense) income expense, net within the unaudited condensed consolidated statement of income.

22




14.
Accumulated Other Comprehensive Loss
The following summarizes the change in accumulated other comprehensive loss for the six months ended June 29, 2018 and June 30, 2017:
 
Currency Translation
 
Unrecognized Loss on Derivatives
 
Unrecognized Loss on Benefit Plans
 
Unrecognized Gain on Investment (1)
 
Accumulated Other Comprehensive Loss (1)
Balance at December 29, 2017
$
(8.2
)
 
$
(4.7
)
 
$
(1.5
)
 
$
—

 
$
(14.4
)
Other comprehensive (loss) income before reclassifications
(7.3
)
 
—

 
0.9

 
—

 
(6.4
)
Amounts reclassified from accumulated other comprehensive loss
—

 
0.5

 
(1.4
)
 
—

 
(0.9
)
Net current period other comprehensive (loss) income
(7.3
)
 
0.5

 
(0.5
)
 
—

 
(7.3
)
Balance at June 29, 2018
$
(15.5
)
 
$
(4.2
)
 
$
(2.0
)
 
$
—

 
$
(21.7
)
(1)
Upon adoption of ASU 2016-01, a reclassification of $1.5 million relating to the unrealized gain on investment resulted in an increase to beginning retained earnings with an offsetting decrease to accumulated other comprehensive loss. See Note 2 for additional details.
 
Currency Translation
 
Unrecognized Loss on Derivatives
 
Unrecognized Loss on Benefit Plans
 
Unrecognized Gain on Investment
 
Accumulated Other Comprehensive Loss
Balance at December 30, 2016
$
(19.5
)
 
$
(5.7
)
 
$
(47.3
)
 
$
—

 
$
(72.5
)
Other comprehensive income before reclassifications
12.1

 
—

 
5.9

 
10.6

 
28.6

Amounts reclassified from accumulated other comprehensive loss
(4.7
)
 
0.6

 
40.0

 
—

 
35.9

Net current period other comprehensive income
7.4

 
0.6

 
45.9

 
10.6

 
64.5

Balance at June 30, 2017
$
(12.1
)
 
$
(5.1
)
 
$
(1.4
)
 
$
10.6

 
$
(8.0
)

The following summarizes reclassifications from accumulated other comprehensive loss for the six months ended June 29, 2018 and June 30, 2017:
 
Amount Reclassified from
Accumulated Other Comprehensive Loss
 
 
 
Six Months Ended
 
 
 
June 29,
2018
 
June 30,
2017
 
Line Item in the Unaudited Condensed Consolidated
Statement of Income
Currency translation
$
—

 
$
(4.7
)
 
Income from discontinued operations, net of income taxes
 
 
 
 
 
 
Amortization and other of unrealized loss on derivatives
0.5

 
0.8

 
Interest expense
Income tax provision
—

 
(0.2
)
 
Income tax benefit
Net of income taxes
0.5

 
0.6

 
 
 
 
 
 
 
 
Amortization of pension and post-retirement benefit plans:
 
 
 
 
 
Net actuarial loss
0.3

 
1.8

 
(1)  
Prior service credit
(1.0
)
 
(1.0
)
 
(1)  
Divestiture of discontinued operations
—

 
(3.1
)
 
Income from discontinued operations, net of income taxes
Plan settlements
(0.7
)
 
69.7

 
(1)  
Total before tax
(1.4
)
 
67.4

 
 
Income tax provision
—

 
(27.4
)
 
Income tax benefit
Net of income taxes
(1.4
)
 
40.0

 
 
 
 
 
 
 
 
Total reclassifications for the period
$
(0.9
)
 
$
35.9

 
 
(1)
These accumulated other comprehensive loss components are included in the computation of net periodic benefit cost. See Note 13 for additional details.


23




15.
Equity

Share Repurchases

On March 16, 2016, the Company's Board of Directors authorized a $350.0 million share repurchase program (the "March 2016 Program"), which was completed during the three months ended March 31, 2017. On March 1, 2017, the Company's Board of Directors authorized an additional $1.0 billion share repurchase program (the "March 2017 Program"), which commenced upon the completion of the March 2016 Program. The March 2017 Program has no expiration date, and the Company currently expects to fully utilize the program.

 
March 2017
Repurchase Program
 
March 2016
Repurchase Program
 
Number of Shares
 
Amount
 
Number of Shares
 
Amount
Authorized repurchase amount
 
 
$
1,000.0

 
 
 
$
350.0

Repurchases:
 
 
 
 
 
 
 
Transition Period 2016 (1)
—

 
—

 
1,501,676

 
84.0

Fiscal 2017
13,490,448

 
380.6

 
5,366,741

 
266.0

Fiscal 2018
3,610,968

 
55.2

 
—

 
—

Remaining amount available
 
 
$
564.2

 
 
 
$
—


(1) Represents the period from October 1, 2016 through December 30, 2016. The Company historically reported its results based on a "52-53 week" year ending on the last Friday in September. On May 17, 2016, the Board of Directors of the Company approved a change in the Company's fiscal year end to the last Friday in December from the last Friday in September. The change in fiscal year end became effective for the Company's 2017 fiscal year, which began on December 31, 2016 and ended on December 29, 2017. As a result of the change in fiscal year end, the Company filed a Transition Report on Form 10-Q on February 7, 2017 covering the period from October 1, 2016 through December 30, 2016.

The Company also repurchases shares from employees in order to satisfy employee tax withholding requirements in connection with the vesting of restricted shares and share option exercises.

16.
Guarantees
In disposing of assets or businesses, the Company has from time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that 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 29, 2018 and December 29, 2017 was $14.5 million and $14.9 million, respectively, of which $11.7 million and $12.1 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 29, 2018 and December 29, 2017. As of June 29, 2018, the maximum future payments the Company could be required to make under these indemnification obligations were $70.2 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $18.4 million and $18.3 million remained in restricted cash, included in long-term other assets on the unaudited condensed consolidated balance sheets at June 29, 2018 and December 29, 2017, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 17.

24



The Company is also liable for product performance; however, the Company believes, given the information currently available, that the ultimate resolution of any such claims will not have a material adverse effect on its financial condition, results of operations and cash flows.
As of June 29, 2018, the Company had various other letters of credit, guarantees and surety bonds totaling $23.5 million.

17.
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 are not expected to have a material adverse effect on its financial condition, results of operations and cash flows.

Governmental Proceedings
Opioid Related Matters
Multidistrict Litigation. The Company, along with other opioid manufacturers and often, distributors, has been named in lawsuits brought by various counties, cities, Native American tribes, hospitals, health care clinics, Medicaid managed care organizations, third-party payers. In general, the lawsuits assert claims of public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO") or similar state laws, consumer fraud, deceptive trade practices, insurance fraud, unjust enrichment and other common law claims arising from defendants' manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys' fees and costs. These lawsuits were originally filed against, or amended to include, the Company in various U.S. District Courts or in state courts with the state court lawsuits subsequently removed to U.S. District Courts. On December 5, 2017, the Judicial Panel in Multidistrict Litigation ("JPML") issued its order establishing a Multidistrict Litigation ("MDL") in the Northern District of Ohio for opioid litigation cases and transferring those cases to the MDL that were originally filed in U.S. District Courts or removed to U.S. District Courts from state court.  There are currently 1,019 lawsuits naming the Company that either are in the MDL or are expected to be transferred to the MDL. The Company intends to vigorously defend itself in these matters.
State Court Lawsuits. On July 12, 2018, the Commonwealth of Kentucky, through its Attorney General, filed suit in the Madison County Circuit Court in Kentucky against the Company. The lawsuit asserts violations of the Kentucky Consumer Protection Act, Medicaid Fraud Statute and Assistance Program Fraud Statute, asserts claims of public nuisance, fraud, negligence and unjust enrichment, and seeks relief similar to that sought in other state and federal actions.
On May 15, 2018, the State of Florida, through its Attorney General, filed suit in the Circuit Court of the Sixth Judicial Circuit in and for Pasco County in Florida against certain opioid distributors and manufacturers, including the Company. The lawsuit asserts violations of the Florida Deceptive and Unfair Trade Practices and RICO, asserts claims of public nuisance and negligence and seeks relief similar to that sought in other state and federal actions.
On December 20, 2017, the State of New Mexico, through its Attorney General, amended its lawsuit pending in the First Judicial District Court in the County of Santa Fe against certain opioid distributors and manufacturers, to add the Company. The lawsuit asserts violations of public nuisance laws and the New Mexico Unfair Practices, Medicaid Fraud and Racketeering Acts and seeks relief similar to that sought in other state and federal actions.
In addition, the Company is currently named in 59 lawsuits pending in state courts in Alabama (1), Arkansas (1), Connecticut (2), Florida (1), Georgia (1), Illinois (1), Louisiana (2), Maine (1), Massachusetts (1), Missouri (1), Nevada (1), New York (1), Ohio (8), Oklahoma (6), Pennsylvania (9), Tennessee (3), Texas (11), Utah (3), Virginia (3) and  West Virginia (2). These state lawsuits are brought on behalf of cities, counties, towns, villages, third party payers, Medicaid managed care organizations, Native American tribes, individuals, and corporations that provide emergency medicine, addiction treatment and recovery services. The lawsuits assert claims and seek damages similar to those sought in the cases pending before the MDL. The Company intends to vigorously defend itself in these state court matters.
Investigations. The Company has also received various subpoenas and requests for information related to the distribution, marketing and sale of the Company's opioid products. On July 26, 2017, the Company received a subpoena from the Department of Justice ("DOJ"), on August 24, 2017, the Company received a Civil Investigative Demand ("CID") from the Missouri Attorney General's Office, on September 22, 2017, the Company received a subpoena from the New Hampshire Attorney General's Office, on January 9, 2018, the Company received a subpoena and CID from the Kentucky Attorney General's Office, on January 16, 2018, the Company received a CID from the Attorney General's Office for the State of Washington, on February 5, 2018, the Company received

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a subpoena from the Attorney General's Office from the State of Alaska and on May 15, 2018, the Company received a CID from the Attorney General's Office for the State of South Carolina.
In addition, on January 27, 2018 the Company received a grand jury subpoena from the U.S. Attorneys' Office ("USAO") for the Southern District of Florida for documents related to the Company's distribution, marketing and sale of its oxymorphone generic products.
The Company is in the process of responding to these subpoenas and CIDs.
The Company has been contacted by the coalition of State Attorneys General investigating the role manufacturers and distributors may have had in contributing to the increased use of opioids in the U.S.
The Company intends to cooperate fully in these investigations.
Since these lawsuits and investigations are in early stages, the Company is unable to predict their outcome or estimate a range of reasonably possible losses.
Other Matters
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania pursuant to which the Antitrust Division of the Department of Justice is seeking documents regarding generic products and pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena, and the Company intends to cooperate fully in the investigation.
SEC Subpoena. In January 2017, the Company received a subpoena from the SEC for documents related to the Company's public statements, filings and other disclosures regarding H.P. Acthar® Gel sales, profits, revenue, promotion and pricing. The Company has responded to this subpoena, and in February 2018, the SEC notified the Company that it had concluded its investigation and that no enforcement action was recommended against the Company.
Boston Subpoena. In December 2016, the Company received a subpoena from the USAO for the District of Massachusetts for documents related to the Company's provision of financial and other support to patients, including through charitable foundations, and related matters. The Company is in the process of responding to this subpoena, and the Company intends to cooperate fully in the investigation.
Texas Pricing Investigation. 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 has responded to these requests.
Mallinckrodt Inc. v. U.S. Food and Drug Administration and United States of America. In November 2014, the Company filed a Complaint ("the Complaint") in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States 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"). The Company also sought a temporary restraining order ("TRO") directing the FDA to reinstate the Orange Book AB rating for the Company's Methylphenidate ER products. The court denied the Company's motion for a TRO and in July 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 appealed the court's decision to the U.S. Court of Appeals for the Fourth Circuit. On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of the Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the United States Court of Appeals for the Fourth Circuit issued an order placing that litigation in abeyance pending the outcome of the withdrawal proceedings. The Company concurrently submitted to the FDA requests for a hearing in the withdrawal proceeding and for an extension of the deadline for submitting documentation supporting the necessity of a hearing.  The FDA granted the Company's initial request to extend the deadline, and on February 21, 2017, the FDA suspended the deadline in order to give the Center for Drug Evaluation and Research ("CDER") an opportunity to complete its production of documents. CDER shared an initial set of documents with the Company in June 2017 and a second set of documents in October 2017. Following the Company's receipt of the October tranche of documents from CDER, the Company presented a supplemental document request to CDER to ensure all of its initial document requests were fulfilled, and on February 13, 2018, CDER provided a final set of documents in response to the Company's requests. In April 2018, the Company filed its submission in support of its position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that the Company's Methylphenidate ER products may lose their FDA approval, which could have a negative impact to the Company's Specialty Generics Disposal Group.
FTC Investigation. In June 2014, Questcor Pharmaceuticals, Inc. ("Questcor") received a subpoena and 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, California, Maryland, Texas, Washington, New York and Alaska (collectively, "the Investigating States") commenced similar investigations focused on whether the transaction

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violates state antitrust laws. On January 17, 2017, the FTC, all Investigating States (except California) ("the Settling States") and the Company entered into an agreement to resolve this matter for a one-time cash payment of $102.0 million and an agreement to license Synacthen Depot to a third party designated by the FTC for possible development in Infantile Spasms ("IS") and Nephrotic Syndrome ("NS") in the U.S. To facilitate that settlement, a complaint was filed on January 18, 2017, in the U.S. District Court for the District of Columbia. The settlement was approved by the court on January 30, 2017. On July 16, 2017, the Company announced the completion of the U.S. license of both the Synacthen trademark and certain intellectual property associated with Synacthen Depot to West Pharmaceuticals to develop and pursue possible FDA approval of the product in IS and NS. The Company retains the right to develop MNK-1411 (the product formerly described as Synacthen Depot) for all other indications in the U.S. and retains rights to the Synacthen trademark outside the U.S.
Therakos Investigation. In March 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation of the U.S. promotion of Therakos'® drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for indications not approved by the FDA, including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos' efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for the Eastern District of Pennsylvania sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company is in the process of responding to these requests.
DEA Investigation. In November 2011 and October 2012, the Company received subpoenas from the U.S. Drug Enforcement Administration ("DEA") requesting production of documents relating to its suspicious order monitoring program for controlled substances. The USAO for the Eastern District of Michigan investigated the possibility that the Company failed to report suspicious orders of controlled substances during the period 2006-2011 in violation of the Controlled Substances Act and its related regulations. The USAO for the Northern District of New York and Office of Chief Counsel for the U.S. DEA investigated the possibility that the Company failed to maintain appropriate records and security measures with respect to manufacturing of certain controlled substances at its Hobart, New York facility during the period 2012-2013. In July 2017, the Company entered into a final settlement with the DEA and the USAOs for the Eastern District of Michigan and the Northern District of New York to settle these investigations. As part of the agreement, the Company paid $35.0 million to resolve all potential claims.
Questcor DOJ Investigation. In September 2012, Questcor received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to H.P. Acthar Gel. 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 were participating in the investigation to review Questcor's promotional practices and related matters related to H.P. Acthar Gel. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to H.P. Acthar Gel. The Company intends to cooperate fully in the investigation.

Patent Litigation
Amitiza Patent Litigation: Teva Pharmaceuticals USA, Inc. In September 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., subsidiaries of the Company, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Teva Pharmaceuticals USA, Inc. ("Teva") alleging that Teva infringed U.S. Patent Nos. 6,414,016, 6,982,283, 7,795,312, 8,026,393, 8,071,613, 8,097,653, 8,338,639, 8,389,542 and 8,748,481 following receipt of an August 2017 notice from Teva concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Teva was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation: Amneal Pharmaceuticals, LLC. In April 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Amneal Pharmaceuticals, LLC ("Amneal") alleging that Amneal infringed U.S. Patent Nos. 6,982,283, 8,026,393, 8,097,653, 8,338,639 and 8,389,542 following receipt of a March 2017 notice from Amneal concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Amneal was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation: Par and DRL. Settlement and License Agreements were entered into with Anchen Pharmaceuticals, Inc., Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively "Par") and Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (collectively "DRL") to settle Paragraph IV patent litigation with each of Par and DRL. Under the terms of the Par settlement dated September 30, 2014, Par was granted a non-exclusive license and right to market a competing generic of Amitiza on or after January 1, 2021, or earlier under certain circumstances. Under the terms of the DRL settlement dated September 14, 2016, DRL was granted a non-exclusive license and right to market a competing generic of Amitiza on or after January 1, 2023, or earlier under certain circumstances.

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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®. In July 2016, the Company filed a second suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning three additional patents recently added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for a generic version of Inomax. The infringement claims in the second suit have been added to the original suit. In September 2016, the Company filed a third suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning a fourth patent recently added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for a generic version of Inomax.
The Company intends to vigorously enforce its intellectual property rights relating to Inomax in both the Inter Partes Review ("IPR") and Praxair litigation proceedings to prevent the marketing of infringing generic products prior to the expiration of the patents covering Inomax. Trial of the suit filed in February 2015 was held in March 2017 and a decision was rendered September 5, 2017 that ruled five patents invalid and six patents not infringed. The Company has appealed the decision to the Court of Appeals for the Federal Circuit. An adverse outcome in the appeal of the Praxair litigation decision ultimately could result in the launch of a generic version of Inomax before the expiration of the last of the listed patents on May 3, 2036 (November 3, 2036 including pediatric exclusivity), which could adversely affect the Company's ability to successfully maximize the value of Inomax and have an adverse effect on its financial condition, results of operations and cash flows.
Inomax Patents: IPR Proceedings. In February 2015 and March 2015, the U.S. Patent and Trademark Office ("USPTO") issued Notices of Filing Dates Accorded to Petitions for IPR petitions filed by Praxair Distribution, Inc. concerning ten patents covering Inomax (i.e., five patents expiring in 2029 and five patents expiring in 2031).
In July 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 in July 2015 that instituted the IPR proceeding in the fifth of this group of patents and the PTAB ruled in July 2016 that one claim of this patent survived review and is valid while the remaining claims were unpatentable.  The Company believed the claim held valid by the PTAB describes and encompasses a manner in which Inomax is distributed in conjunction with its approved labeling and that Praxair infringes that claim. Praxair filed an appeal and Mallinckrodt filed a cross-appeal of this decision to the Court of Appeals for the Federal Circuit. Oral argument of that appeal occurred in January 2018. The Federal Circuit decision was issued May 16, 2018 and held all claims unpatentable (invalid).
In March 2016, Praxair Distribution, Inc. submitted additional IPR petitions for the five patents expiring in 2029. The PTAB issued non-appealable rulings in August and September 2016 denying institution of all five of these additional IPR petitions.