MNK Q2 10-Q 03.27.15



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________
FORM 10-Q
 _________________________________
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 27, 2015

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

Commission File Number : 001-35803
 _________________________________
Mallinckrodt public limited company
(Exact name of registrant as specified in its charter)
 _________________________________
Ireland
 
98-1088325
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
Damastown, Mulhuddart
Dublin 15, Ireland
(Address of principal executive offices) (Zip Code)

Telephone: +353 1 880-8180
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No  o

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

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

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

Indicate number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Ordinary shares, $0.20 par value - 116,974,956 shares as of April 27, 2015





MALLINCKRODT PLC
INDEX TO FORM 10-Q
 
 
 
Page
 
 
 
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited).
 
 
Condensed Consolidated Statements of Income for the three and six months ended March 27, 2015 and March 28, 2014.
 
Condensed Consolidated Statements of Comprehensive Income for the three and six months ended March 27, 2015 and March 28, 2014.
 
Condensed Consolidated Balance Sheets as of March 27, 2015 and September 26, 2014.
 
Condensed Consolidated Statements of Cash Flows for the six months ended March 27, 2015 and March 28, 2014.
 
Condensed Consolidated Statement of Changes in Shareholders' Equity for the period September 26, 2014 to March 27, 2015.
 
Notes to Condensed Consolidated Financial Statements.
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
Item 4.
Controls and Procedures.
 
 
 
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings.
Item 1A.
Risk Factors.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3.
Defaults Upon Senior Securities.
Item 4.
Mine Safety Disclosures.
Item 5.
Other Information.
Item 6.
Exhibits.
SIGNATURES









PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements.


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

 
Three Months Ended
 
Six Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Net sales
$
909.9

 
$
557.8

 
$
1,776.2

 
$
1,098.0

Cost of sales
421.4

 
295.2

 
849.0

 
579.8

Gross profit
488.5

 
262.6

 
927.2

 
518.2

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
343.5

 
194.1

 
606.0

 
340.3

Research and development expenses
47.0

 
41.4

 
89.4

 
80.4

Separation costs

 
2.6

 

 
4.8

Restructuring charges, net
3.7

 
21.7

 
10.9

 
29.7

Gains on divestiture and license
(0.9
)
 
(0.9
)
 
(1.7
)
 
(13.8
)
Operating income
95.2

 
3.7

 
222.6

 
76.8

 
 
 
 
 
 
 
 
Interest expense
(57.4
)
 
(12.4
)
 
(106.2
)
 
(22.2
)
Interest income
0.4

 
0.5

 
0.5

 
0.8

Other income (expense), net
4.1

 
(0.4
)
 
8.2

 
(1.0
)
Income (loss) from continuing operations before income taxes
42.3

 
(8.6
)
 
125.1

 
54.4

 
 
 
 
 
 
 
 
Income tax benefit
(34.2
)
 
(20.3
)
 
(43.5
)
 
(3.7
)
Income from continuing operations
76.5

 
11.7

 
168.6

 
58.1

 
 
 
 
 
 
 
 
Income (loss) from discontinued operations, net of income taxes
22.3

 
(0.1
)
 
22.9

 
(0.9
)
 
 
 
 
 
 
 
 
Net income
$
98.8

 
$
11.6

 
$
191.5

 
$
57.2

 
 
 
 
 
 
 
 
Basic earnings (loss) per share (Note 7):
 
 
 
 
 
 
 
Income from continuing operations
$
0.66

 
$
0.20

 
$
1.45

 
$
1.00

Income (loss) from discontinued operations
0.19

 

 
0.20

 
(0.02
)
Net income
$
0.85

 
$
0.20

 
$
1.65

 
$
0.99

 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
115.6

 
58.2

 
115.2

 
58.0

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share (Note 7):
 
 
 
 
 
 
 
Income from continuing operations
$
0.65

 
$
0.20

 
$
1.43

 
$
0.99

Income (loss) from discontinued operations
0.19

 

 
0.19

 
(0.02
)
Net income
$
0.84

 
$
0.20

 
$
1.62

 
$
0.97

 
 
 
 
 
 
 
 
Diluted weighted-average shares outstanding
117.2

 
59.1

 
116.8

 
58.7


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
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Net income
$
98.8

 
$
11.6

 
$
191.5

 
$
57.2

Other comprehensive loss, net of tax

 

 
 
 
 
Currency translation adjustments
(36.5
)
 
(2.4
)
 
(58.9
)
 
(2.0
)
Unrecognized gain on derivatives, net of $(0.1), $-, ($0.1) and ($0.1) tax
0.1

 
0.1

 
0.2

 
0.2

Unrecognized gain (loss) on benefit plans, net of $0.4, $-, ($0.1) and $0.1 tax
(0.1
)
 

 
0.9

 
(0.3
)
Total other comprehensive loss, net of tax
(36.5
)
 
(2.3
)
 
(57.8
)
 
(2.1
)
Comprehensive income
$
62.3

 
$
9.3

 
$
133.7

 
$
55.1


See Notes to Condensed Consolidated Financial Statements.


3




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

 
March 27,
2015
 
September 26,
2014
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
1,053.5

 
$
707.8

Accounts receivable, less allowance for doubtful accounts of $8.4 and $6.6
556.1

 
545.6

Inventories
348.7

 
396.6

Deferred income taxes
136.2

 
165.2

Prepaid expenses and other current assets
124.5

 
255.8

Total current assets
2,219.0

 
2,071.0

Property, plant and equipment, net
940.9

 
949.2

Goodwill
2,426.1

 
2,401.9

Intangible assets, net
6,858.7

 
7,112.2

Other assets
369.6

 
330.5

Total Assets
$
12,814.3

 
$
12,864.8

 
 
 
 
Liabilities and Shareholders' Equity
 
 
 
Current Liabilities:
 
 
 
Current maturities of long-term debt
$
22.4

 
$
21.2

Accounts payable
141.9

 
128.7

Accrued payroll and payroll-related costs
75.1

 
125.1

Accrued royalties
28.0

 
68.0

Accrued and other current liabilities
508.3

 
561.8

Total current liabilities
775.7

 
904.8

Long-term debt
3,966.3

 
3,951.5

Pension and postretirement benefits
116.6

 
119.1

Environmental liabilities
79.0

 
59.9

Deferred income taxes
2,297.0

 
2,398.6

Other income tax liabilities
109.7

 
122.6

Other liabilities
283.9

 
350.3

Total Liabilities
7,628.2

 
7,906.8

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

 

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

 

Ordinary shares, $0.20 par value, 500,000,000 authorized; 117,226,478 and 116,160,353 issued; 116,861,291 and 115,929,588 outstanding
23.4

 
23.2

Ordinary shares held in treasury at cost, 365,187 and 230,765
(29.8
)
 
(17.5
)
Additional paid-in capital
5,278.9

 
5,172.4

Retained earnings
(94.3
)
 
(285.8
)
Accumulated other comprehensive income
7.9

 
65.7

Total Shareholders' Equity
5,186.1

 
4,958.0

Total Liabilities and Shareholders' Equity
$
12,814.3

 
$
12,864.8


See Notes to Condensed Consolidated Financial Statements.


4




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

 
Six Months Ended
 
March 27,
2015
 
March 28,
2014
Cash Flows From Operating Activities:
 
 
 
Net income
$
191.5

 
$
57.2

(Income) loss from discontinued operations, net of income taxes
(22.9
)
 
0.9

Income from continuing operations
168.6

 
58.1

Adjustments to reconcile net cash provided by operating activities:
 
 
 
Depreciation and amortization
301.2

 
76.7

Share-based compensation
65.9

 
9.4

Deferred income taxes
(124.2
)
 
(12.3
)
Non-cash restructuring charge

 
2.6

Other non-cash items
(36.7
)
 
4.1

Changes in assets and liabilities, net of the effects of acquisitions:
 
 
 
Accounts receivable, net
(29.8
)
 
79.6

Inventories
42.3

 
(39.0
)
Accounts payable
19.1

 
(34.0
)
Income taxes
82.3

 
0.3

Other
(123.2
)
 
(4.3
)
Net cash provided by operating activities
365.5

 
141.2

Cash Flows From Investing Activities:
 
 
 
Capital expenditures
(55.1
)
 
(50.7
)
Acquisitions and intangibles, net of cash acquired

 
(1,293.2
)
Restricted cash
0.4

 
4.1

Other
1.7

 
8.0

Net cash used in investing activities
(53.0
)
 
(1,331.8
)
Cash Flows From Financing Activities:
 
 
 
Issuance of external debt
80.0

 
1,296.8

Repayment of external debt and capital leases
(63.5
)
 
(30.8
)
Debt financing costs
(0.4
)
 
(32.2
)
Excess tax benefit from share-based compensation
20.2

 
4.0

Proceeds from exercise of share options
20.6

 
16.1

Repurchase of shares
(12.3
)
 
(1.8
)
Other
(4.0
)
 

Net cash provided by financing activities
40.6

 
1,252.1

Effect of currency rate changes on cash
(7.4
)
 
(2.1
)
Net increase in cash and cash equivalents
345.7

 
59.4

Cash and cash equivalents at beginning of period
707.8

 
275.5

Cash and cash equivalents at end of period
$
1,053.5

 
$
334.9


See Notes to Condensed Consolidated Financial Statements.



5




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

 
$
23.2

 
0.2

 
$
(17.5
)
 
$
5,172.4

 
$
(285.8
)
 
$
65.7

 
$
4,958.0

Net income

 

 

 

 

 
191.5

 

 
191.5

Currency translation adjustments

 

 

 

 

 

 
(58.9
)
 
(58.9
)
Change in derivatives, net of tax

 

 

 

 

 

 
0.2

 
0.2

Minimum pension liability, net of tax

 

 

 

 

 

 
0.9

 
0.9

Share options exercised
0.7

 
0.1

 

 

 
20.5

 

 

 
20.6

Vesting of restricted shares
0.3

 
0.1

 

 

 
(0.1
)
 

 

 

Excess tax benefit from share-based compensation

 

 

 

 
20.2

 

 

 
20.2

Share-based compensation

 

 

 

 
65.9

 

 

 
65.9

Repurchase of shares

 

 
0.2

 
(12.3
)
 

 

 

 
(12.3
)
Balance at March 27, 2015
117.2

 
$
23.4

 
0.4

 
$
(29.8
)
 
$
5,278.9

 
$
(94.3
)
 
$
7.9

 
$
5,186.1

 

See Notes to Condensed Consolidated Financial Statements.


6




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

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

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

Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in U.S. Dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and entities in which they own or control more than fifty percent of the voting shares, or have the ability to control through similar rights. The results of entities disposed of are included in the unaudited condensed consolidated financial statements up to the date of disposal and, where appropriate, these operations have been reflected as discontinued operations. Divestitures of product lines and businesses that did not qualify as discontinued operations have been reflected in operating income. All intercompany balances and transactions have been eliminated in consolidation and, in the opinion of management, all normal recurring adjustments necessary for a fair presentation have been included in the interim results reported. The fiscal year-end balance sheet data was derived from audited consolidated financial statements, but do not include all of the annual disclosures required by GAAP; accordingly, these unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited annual consolidated and combined financial statements included in its Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission ("the SEC") on November 24, 2014 and Current Report on Form 8-K filed with the SEC on April 3, 2015.

Fiscal Year
The Company reports its results based on a "52-53 week" year ending on the last Friday of September. The second fiscal quarters of 2015 and 2014 ended on March 27, 2015 and March 28, 2014, respectively. Unless otherwise indicated, the three and six months ended March 27, 2015 refers to the thirteen and twenty-six week period ended March 27, 2015 and the three and six months ended March 28, 2014 refers to the thirteen and twenty-six week period ended March 28, 2014. Fiscal 2014 consisted of 52 weeks and ended on September 26, 2014.

7




2.
Recently Issued Accounting Standards
The Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-04, "Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date," in February 2013. This update provides guidance for the recognition, measurement and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date, except for obligations addressed within existing guidance. An entity is required to measure those obligations as the sum of the amount the entity has agreed to pay on the basis of its arrangement among its co-obligors, and any additional amounts it expects to pay on behalf of its co-obligors. The guidance also requires the entity to disclose the nature and amount of those obligations. The guidance was effective for the Company in the first quarter of fiscal 2015. The adoption did not have a material impact to the Company's financial condition, results of operations and cash flows.
FASB issued ASU 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists," in July 2013. This update provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists, to eliminate diversity in practice in the presentation of unrecognized tax benefits in those instances. Except in certain circumstances, an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. This guidance was effective for the Company in the first quarter of fiscal 2015. The adoption did not have a material impact to the Company's financial condition, results of operations and cash flows.
FASB issued ASU 2014-08, "Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity," in April 2014. Under the new guidance, only disposals representing a strategic shift in a company's operations and financial results should be reported as discontinued operations, with expanded disclosures. In addition, disclosure of the pre-tax income attributable to a disposal of a significant part of an organization that does not qualify as a discontinued operation is required. This guidance is effective for the Company in the first quarter of fiscal 2016, with early adoption permitted. The Company has not had any recent significant disposals. The Company will assess the impact of the pronouncement to prospective disposals, if applicable, for potential disclosures in future filings and may consider early adoption of the guidance.
FASB issued ASU 2014-09, "Revenue from Contracts with Customers," in May 2014. The issuance of ASU 2014-09 and International Financial Reporting Standards ("IFRS") 15, "Revenue from Contracts with Customers," completes the joint effort by FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and develop a common revenue standard for GAAP and IFRS. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, applying the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance is effective for the Company in the first quarter of fiscal 2019. Early adoption is permitted in the first quarter of fiscal 2018. The Company continues to assess the potential impact of the guidance.

3.
License of Intellectual Property
The Company was involved in patent disputes with a counterparty relating to certain intellectual property relevant to extended-release oxymorphone. In December 2013, the counterparty agreed to pay the Company an upfront cash payment of $4.0 million and contractually obligated future payments of $8.0 million through July 2018, in exchange for the withdrawal of all claims associated with the intellectual property and a license to utilize the Company's intellectual property. The Company completed the earnings process associated with the agreement and recorded an $11.7 million gain, included within gains on divestiture and license, during the six months ended March 28, 2014.





8




4.
Acquisitions and License Agreements
Business Acquisitions
Questcor Pharmaceuticals
On August 14, 2014, the Company acquired all of the outstanding common stock of Questcor, a biopharmaceutical company, for total consideration of approximately $5.9 billion, comprised of cash consideration of $30.00 per share, 0.897 ordinary shares of the Company for each share of Questcor common stock owned and the portion of outstanding equity awards deemed to have been earned as of August 14, 2014 ("the Questcor Acquisition"). The acquisition was funded through an issuance of approximately 57 million ordinary shares, proceeds from the issuance of $900.0 million aggregate principal amount of senior unsecured notes, $700.0 million of borrowings under a senior secured term loan facility, $150.0 million of cash from a receivable securitization program, as further discussed in Note 11, and cash on hand. H.P. Acthar® Gel (repository corticotropin injection) ("Acthar"), Questcor's primary product, is focused on the treatment of patients with serious, difficult-to-treat autoimmune and rare diseases. Acthar is an injectable drug that is approved by the U.S. Food and Drug Administration ("FDA") for use in 19 indications, including the currently marketed areas of neurology, rheumatology, nephrology and pulmonology. As part of the acquisition, the Company also acquired BioVectra, Inc. ("BioVectra"), a specialty contract manufacturer that provides services to the global pharmaceuticals and biotechnology industry.

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

Fair Value Allocation
The following amounts represent the preliminary allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Questcor Acquisition, including preliminary goodwill and 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 Questcor Acquisition. The changes in the purchase price allocation and preliminary goodwill based on the final valuation may include, but are not limited to, the impact of state tax rates in determining the deferred tax balances. During the six months ended March 27, 2015, there were adjustments to the purchase price allocation primarily related to the ongoing evaluation of the non tax deductible branded pharmaceutical fee associated with net sales of Acthar and U.S. state deferred tax balances. The following also presents the final allocation of the fair value of the identifiable assets acquired and liabilities assumed for the Cadence Acquisition. There were no measurement period adjustments recognized during the six months ended March 27, 2015 that would amend the previously disclosed preliminary purchase price allocation for the Cadence Acquisition.
 
Questcor
 
Cadence
Cash and cash equivalents
$
445.1

 
$
43.2

Inventory
67.9

 
21.0

Intangible assets
5,601.1

 
1,300.0

Goodwill
1,795.7

 
318.1

Other assets, current and non-current (1)
274.3

 
18.0

Total assets acquired
8,184.1

 
1,700.3

Current liabilities (2)
169.5

 
60.1

Unpaid purchase consideration (current)
128.8

 

Other liabilities (non-current) (2)
184.8

 
18.7

Deferred tax liabilities, net (non-current)
1,914.5

 
292.3

Total liabilities assumed
2,397.6

 
371.1

Net assets acquired
$
5,786.5

 
$
1,329.2

(1)
This amount includes $87.3 million and $14.7 million of accounts receivable for the Questcor Acquisition and the Cadence Acquisition, respectively, which is also the gross contractual value.
(2)
These amounts include $30.0 million of pre-existing Cadence debt, which the Company repaid upon completion of the Cadence Acquisition.

9





The following reconciles the total consideration to net assets acquired:
 
Questcor
 
Cadence
Total consideration, net of cash
$
5,470.2

 
$
1,286.0

Plus: cash assumed in acquisition
445.1

 
43.2

Total consideration
5,915.3

 
1,329.2

Less: unpaid purchase consideration
(128.8
)
 

Net assets acquired
$
5,786.5

 
$
1,329.2


Intangible assets acquired consist of the following:
Questcor
Amount
 
Amortization Period
Completed technology
$
5,343.3

 
18 years
Trademark
5.2

 
13 years
Customer relationships
34.3

 
12 years
In-process research and development
218.3

 
Non-Amortizable
 
$
5,601.1

 
 

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

Cadence
Amount
 
Amortization Period
Completed technology
$
1,300.0

 
8 years

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

10




Financial Results
The amount of net sales and earnings included in the Company's results for the periods presented were as follows:
 
Three Months Ended
 
Six Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Net sales
 
 
 
 
 
 
 
Questcor
$
259.5

 
$

 
$
547.3

 
$

Cadence
68.1

 
5.3

 
139.5

 
5.3

 
$
327.6

 
$
5.3

 
$
686.8

 
$
5.3

Operating income (loss)
 
 
 
 
 
 
 
Questcor
$
7.3

 
$

 
$
88.5

 
$

Cadence
(32.3
)
 
(9.0
)
 
(41.6
)
 
(9.0
)
 
$
(25.0
)
 
$
(9.0
)
 
$
46.9

 
$
(9.0
)

The amount of amortization on acquired intangible assets included within operating income (loss) for the periods presented was as follows:
 
Three Months Ended
 
Six Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Intangible asset amortization
 
 
 
 
 
 
 
Questcor
$
75.4

 
$

 
$
150.8

 
$

Cadence
40.7

 
4.8

 
81.3

 
4.8

 
$
116.1

 
$
4.8

 
$
232.1

 
$
4.8


Acquisition-related costs incurred for the Cadence acquisition during the three and six month periods ended March 28, 2014 were $17.6 million, and were included within selling, general and administrative expenses in the consolidated statements of income.
During the three months ended March 27, 2015 and March 28, 2014, the Company recognized $4.4 million and $1.1 million, respectively, of expense primarily associated with fair value adjustments of acquired inventory. During the six months ended March 27, 2015 and March 28, 2014, the Company recognized $35.2 million and $1.1 million, respectively, of expense associated with fair value adjustments of acquired inventory. This expense was included within cost of sales.

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


11




The following unaudited pro forma financial information has been prepared for comparative purposes only and is not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed date, nor is it necessarily an indication of future operating results. In addition, the unaudited pro forma financial information does not reflect the cost of any integration activities, benefits from any synergies that may be derived from the acquisitions or revenue growth that may be anticipated.
 
Three Months Ended
 
Six Months Ended
 
March 28,
2014
 
March 28,
2014
Net sales
$
815.3

 
$
1,633.7

Net income
10.2

 
70.5

 
 
 
 
Basic earnings per share
$
0.09

 
$
0.62

Diluted earnings per share
0.09

 
0.61


License Agreement
Bristol-Myers Squibb
As part of the Cadence Acquisition, the Company acquired the exclusive development and commercialization rights to Ofirmev in the U.S. and Canada, as well as the rights to the patents and technology, which were originally in-licensed by Cadence from BMS in March 2006. BMS sublicensed these rights to Cadence under a license agreement with SCR Pharmatop S.A. ("Pharmatop"), and the Company has the right to grant sublicenses to third parties. Under this license agreement, the Company may be obligated to make future milestone payments of up to $25.0 million upon the achievement of certain levels of net sales, of which $10.0 million was paid during the three months ended March 27, 2015. In addition, the Company is obligated to pay royalties on sales of the product. During the three and six months ended March 27, 2015, the Company paid royalties of $5.0 million and $15.1 million, respectively. The royalties paid during the three and six months ended March 28, 2014, were immaterial.


5.
Restructuring and Related Charges
During fiscal 2013, the Company launched a restructuring program designed to improve its cost structure ("the 2013 Mallinckrodt Program"). The 2013 Mallinckrodt Program includes actions across all segments, as well as within corporate functions. The Company expects to incur charges of $100.0 million to $125.0 million under this program as the specific actions required to execute on these initiatives are identified and approved, most of which are expected to be incurred by the end of fiscal 2016. In addition to the 2013 Mallinckrodt Program, the Company has taken restructuring actions to generate synergies from its fiscal 2014 acquisitions.
Net restructuring and related charges by segment were as follows:
 
Three Months Ended
 
Six Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Specialty Brands
$
0.9

 
$
2.1

 
$
15.1

 
$
2.1

Specialty Generics
2.7

 
0.6

 
2.7

 
0.6

Global Medical Imaging
0.2

 
18.5

 
(7.1
)
 
26.6

Corporate

 
0.5

 
0.4

 
0.5

Restructuring and related charges, net
3.8

 
21.7

 
11.1

 
29.8

Less: accelerated depreciation
(0.1
)
 

 
(0.2
)
 
(0.1
)
Restructuring charges, net
$
3.7

 
$
21.7

 
$
10.9

 
$
29.7



12




Net restructuring and related charges were comprised of the following:
 
Three Months Ended
 
Six Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
2013 Mallinckrodt Program
$
2.9

 
$
22.6

 
$
(2.0
)
 
$
30.9

Acquisitions
0.9

 
(0.4
)
 
13.1

 
(0.4
)
Other

 
(0.5
)
 

 
(0.7
)
Total
3.8

 
21.7

 
11.1

 
29.8

Less: non-cash charges, including accelerated share-based compensation expense
(1.0
)
 
(2.6
)
 
(7.9
)
 
(2.7
)
Total charges expected to be settled in cash
$
2.8

 
$
19.1

 
$
3.2

 
$
27.1


Non-cash charges during the three and six months ended March 27, 2015 included $0.9 million and $7.7 million of accelerated share-based compensation expense related to employee terminations, primarily associated with the Questcor Acquisition. Non-cash charges during the three and six months ended March 28, 2014 included a $2.6 million non-cash facility closure charge associated with restructuring activities within the Global Medical Imaging segment.
The following table summarizes cash activity for restructuring reserves, substantially all of which are related to employee severance and benefits:
 
2013 Mallinckrodt Program
 
Acquisitions
 
Other
 
Total
Balance at September 26, 2014
$
26.6

 
$
7.9

 
$
0.4

 
$
34.9

Charges
5.8

 
6.3

 

 
12.1

Changes in estimate
(7.9
)
 
(1.0
)
 

 
(8.9
)
Cash payments
(14.7
)
 
(11.3
)
 
(0.1
)
 
(26.1
)
Reclassifications (1)
(1.3
)
 

 

 
(1.3
)
Currency translation
(0.7
)
 

 

 
(0.7
)
Balance at March 27, 2015
$
7.8

 
$
1.9

 
$
0.3

 
$
10.0

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

Net restructuring and related charges, including associated asset impairments, incurred cumulative-to-date related to the 2013 Mallinckrodt Program were as follows:
Specialty Brands
$
3.1

Specialty Generics
14.1

Global Medical Imaging
64.4

Corporate
5.7

 
$
87.3


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

6.
Income Taxes
The Company recognized an income tax benefit of $34.2 million on income from continuing operations before income taxes of $42.3 million for the three months ended March 27, 2015 and an income tax benefit of $20.3 million on loss from continuing operations before income taxes of $8.6 million for the three months ended March 28, 2014. This resulted in effective tax rates of negative 80.9% and positive 236.0% for the three months ended March 27, 2015 and March 28, 2014, respectively. The Company recognized income tax benefits of $43.5 million and $3.7 million on income from continuing operations before income taxes of $125.1 million and $54.4 million for the six months ended March 27, 2015 and March 28, 2014, respectively. This resulted in effective tax rates of negative 34.8% and negative 6.8% for the six months ended March 27, 2015 and March 28, 2014, respectively.

13





The $13.9 million increase in tax benefit for the three months ended March 27, 2015, as compared with the three months ended March 28, 2014, resulted in an approximately 316% decrease in the effective tax rate. Of this overall decrease, 212% was attributable to a diminutive loss from continuing operations before taxes for the three months ended March 28, 2014, 66% was due to an increase in amortization of acquired intangible assets resulting in an increase to the favorable rate difference between non-U.S. and U.S. tax jurisdictions,36% was due to an increase in the favorable rate difference between non-U.S. and U.S. tax jurisdictions related to the impact of recent acquisitions which includes the impacts of acquisition financing and the integration of the acquired intangible property into the Company’s legal entity structure, and 3% was due to the recognition of previously unrecognized tax benefits within the three months ended March 27, 2015.
The effective rate for the six months ended March 27, 2015, as compared with the six months ended March 28, 2014, decreased by approximately 28%, of which approximately 14% was attributable to an increase in the favorable rate difference between non-U.S. and U.S. tax jurisdictions related to the impact of recent acquisitions, which includes the impacts of acquisition financing and the integration of the acquired intangible property into the Company’s legal entity structure, and 10% was due to an increase in amortization of acquired intangible assets resulting in an increase to the favorable rate difference between non-U.S. and U.S. tax jurisdictions.
As a part of the Cadence integration, the Company entered into an internal installment sale transaction during the year ended September 26, 2014. As a part of the Questcor integration, the Company entered into an internal installment sale transaction during the three months ended December 26, 2014. The Questcor internal installment sale transaction resulted in a decrease of $1,488.7 million to the deferred tax liability associated with the Acthar intangible asset, a $1,515.9 million increase to the deferred tax liability associated with an installment sale note receivable, a $25.3 million increase to deferred tax charges and a $1.9 million increase to prepaid taxes.
During the three and six months ended March 27, 2015, the Company recognized a$22.5 million benefit associated with the expiration of tax indemnifications, as further discussed in Note 16, within discontinued operations within the unaudited condensed consolidated statement of income. The Company realized a deferred tax asset of $8.2 million and released a corresponding valuation allowance, which resulted in no net tax consequences associated with this expiration.
The Company's unrecognized tax benefits, excluding interest, totaled $77.4 million at March 27, 2015 and $82.0 million at September 26, 2014. The net decrease of $4.6 million primarily resulted from decreases to prior period tax positions of $2.7 million, settlements of $4.0 million and the lapse of the applicable statutes of limitation of $1.3 million, which were partially offset by $3.4 million of increases to current year activity. If favorably settled, the $77.4 million of unrecognized tax benefits at March 27, 2015 would impact the effective tax rate. The total amount of accrued interest related to these obligations was $42.0 million at March 27, 2015 and $45.1 million at September 26, 2014.
Additionally, the Company reduced its current and non-current payables by $5.0 million for matters other than uncertain tax positions related to periods prior to September 29, 2012. These reductions included payments of $3.0 million and a favorable impact to the tax provision for the three and six months ended March 27, 2015.
It is reasonably possible that within the next twelve months, as a result of the resolution of various federal, state and foreign examinations and appeals and the expiration of various statutes of limitation, the unrecognized tax benefits will decrease by up to $15.0 million and the amount of interest and penalties will decrease by up to $11.3 million.


7.
Earnings (Loss) per Share
Beginning in the fourth quarter of fiscal 2014, basic earnings (loss) per share was computed using the two-class method. The two-class method is an earnings allocation that determines earnings per share for each class of common stock and participating securities according to dividends declared and participation rights in undistributed earnings. The Company's restricted stock awards, issued in conjunction with the Questcor Acquisition in August 2014, are considered participating securities as holders are entitled to receive non-forfeitable dividends during the vesting term. Diluted earnings per share includes securities that could potentially dilute basic earnings per share during a reporting period, which includes all share-based compensation awards other than participating securities. Dilutive securities, including participating securities, are not included in the computation of loss per share when the Company reports a net loss from continuing operations as the impact would be anti-dilutive.

14




Prior to the fourth quarter of fiscal 2014, basic earnings (loss) per share was computed by dividing net income by the number of weighted-average shares outstanding during the period. Diluted earnings (loss) per share was computed using the weighted-average shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represented the incremental ordinary shares issuable for restricted share units and share option exercises. The Company calculated the dilutive effect of outstanding restricted share units and share options on earnings (loss) per share by application of the treasury stock method.
 
Three Months Ended
 
Six Months Ended
 
March 27, 2015
 
March 28, 2014
 
March 27, 2015
 
March 28, 2014
Earnings (loss) per share numerator:
 
 
 
 
 
 
 
Income from continuing operations attributable to common shareholders before allocation of earnings to participating securities
$
76.5

 
$
11.7

 
$
168.6

 
$
58.1

Less: earnings allocated to participating securities
0.7

 

 
1.7

 

Income from continuing operations attributable to common shareholders, after earnings allocated to participating securities
75.8

 
11.7

 
166.9

 
58.1

Income (loss) from discontinued operations
22.3

 
(0.1
)
 
22.9

 
(0.9
)
Less: earnings from discontinued operations allocated to participating securities
0.2

 

 
0.2

 

Income (loss) from discontinued operations attributable to common shareholders, after allocation of earnings to participating securities
22.1

 
(0.1
)
 
22.7

 
(0.9
)
Net income attributable to common shareholders, after allocation of earnings to participating securities
$
97.9

 
$
11.6

 
$
189.6

 
$
57.2

Earnings (loss) per share denominator:
 
 
 
 
 
 
 
Weighted-average shares outstanding - basic
115.6

 
58.2

 
115.2

 
58.0

Impact of dilutive securities
1.6

 
0.9

 
1.6

 
0.7

Weighted-average shares outstanding - diluted
117.2

 
59.1

 
116.8

 
58.7

Basic earnings (loss) per share attributable to common shareholders
 
 
 
 
 
 
 
Income from continuing operations
$
0.66

 
$
0.20

 
$
1.45

 
$
1.00

Income (loss) from discontinued operations
0.19

 

 
0.20

 
(0.02
)
Net income attributable to common shareholders
$
0.85

 
$
0.20

 
$
1.65

 
$
0.99

Diluted earnings (loss) per share attributable to common shareholders
 
 
 
 
 
 
 
Income from continuing operations
$
0.65

 
$
0.20

 
$
1.43

 
$
0.99

Income (loss) from discontinued operations
0.19

 

 
0.19

 
(0.02
)
Net income attributable to common shareholders
$
0.84

 
$
0.20

 
$
1.62

 
$
0.97


There were no anti-dilutive equity awards excluded from the computation of diluted earnings per share for the three and six months ended March 27, 2015 and March 28, 2014, respectively.

8.
Inventories
Inventories were comprised of the following at the end of each period: 
 
March 27,
2015
 
September 26,
2014
Raw materials and supplies
$
77.0

 
$
73.6

Work in process
178.4

 
212.1

Finished goods
93.3

 
110.9

 
$
348.7

 
$
396.6




15




9.
Property, Plant and Equipment
The gross carrying amount and accumulated depreciation of property, plant and equipment at the end of each period was as follows:
 
March 27,
2015
 
September 26, 2014
Property, plant and equipment, gross
$
1,900.0

 
$
1,888.4

Less: accumulated depreciation
(959.1
)
 
(939.2
)
Property, plant and equipment, net
$
940.9

 
$
949.2


Depreciation expense for property, plant and equipment was $27.0 million and $26.1 million during the three months ended March 27, 2015 and March 28, 2014, respectively, and $52.1 million and $52.4 million during the six months ended March 27, 2015 and March 28, 2014, respectively. Depreciation expense included depreciation on demonstration equipment of $0.5 million and $0.9 million for the three months ended March 27, 2015 and March 28, 2014, respectively, and $0.9 million and $2.0 million for the six months ended March 27, 2015 and March 28, 2014, respectively. Demonstration equipment was included within other assets on the unaudited condensed consolidated balance sheets.

10.
Goodwill and Intangible Assets
The gross carrying amount and accumulated impairment of goodwill by segment at the end of each period were as follows:
 
March 27, 2015
 
September 26, 2014
 
Gross
Carrying
Amount
 
Accumulated Impairment
 
Gross
Carrying
Amount
 
Accumulated Impairment
Specialty Brands
$
2,219.1

 
$

 
$
2,194.9

 
$

Specialty Generics
207.0

 

 
207.0

 

Global Medical Imaging
219.7

 
(219.7
)
 
219.7

 
(219.7
)
Total
$
2,645.8

 
$
(219.7
)
 
$
2,621.6

 
$
(219.7
)

The gross carrying amount and accumulated amortization of intangible assets at the end of each period were as follows:
 
March 27, 2015
 
September 26, 2014
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Gross
Carrying
Amount
 
Accumulated
Amortization
Amortizable:
 
 
 
 
 
 
 
Completed technology
$
7,040.1

 
$
578.4

 
$
7,040.1

 
$
339.7

Licenses
185.1

 
93.6

 
185.1

 
87.3

Customer relationships
29.9

 
2.6

 
33.8

 
0.6

Trademarks
12.4

 
4.4

 
13.0

 
4.1

Other
6.7

 
6.7

 
6.7

 
5.0

Total
$
7,274.2

 
$
685.7

 
$
7,278.7

 
$
436.7

Non-Amortizable:
 
 
 
 
 
 
 
Trademarks
$
35.0

 
 
 
$
35.0

 
 
In-process research and development
235.2

 
 
 
235.2

 
 
Total
$
270.2

 
 
 
$
270.2

 
 


16




Intangible asset amortization expense was $123.6 million and $15.5 million during the three months ended March 27, 2015 and March 28, 2014, respectively. Intangible asset amortization expense was $249.1 million and $24.3 million during the six months ended March 27, 2015 and March 28, 2014, respectively. The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
 
 
Remainder of fiscal 2015
$
247.4

Fiscal 2016
494.2

Fiscal 2017
492.3

Fiscal 2018
483.3

Fiscal 2019
483.0




11.
Debt
Debt was comprised of the following at the end of each period:
 
March 27,
2015
 
September 26, 2014
Current maturities of long-term debt:
 
 
 
2.85% term loan due April 2016
$
0.4

 
$
0.4

Term loans due March 2021
20.0

 
18.2

4.00% term loan due February 2022
1.1

 
1.2

Capital lease obligation
0.9

 
1.4

Total current debt
22.4

 
21.2

Long-term debt:
 
 
 
Variable-rate receivable securitization
180.0

 
150.0

2.85% term loan due April 2016
2.2

 
2.7

3.50% notes due April 2018
300.0

 
300.0

Term loans due March 2021
1,962.7

 
1,972.1

4.00% term loan due February 2022
7.9

 
9.6

9.50% debentures due May 2022
10.4

 
10.4

5.75% notes due August 2022
900.0

 
900.0

8.00% debentures due March 2023
4.7

 
8.0

4.75% notes due April 2023
598.4

 
598.3

Capital lease obligation

 
0.4

Total long-term debt
3,966.3

 
3,951.5

Total debt
$
3,988.7

 
$
3,972.7


In April 2013, Mallinckrodt International Finance S.A. ("MIFSA"), a subsidiary of the Company, issued and sold in a private placement $300.0 million aggregate principal amount of 3.50% senior unsecured notes due April 2018 and $600.0 million aggregate principal amount of 4.75% senior unsecured notes due April 2023 (collectively, "the Notes"). The Notes are subject to an indenture which contains customary affirmative and negative covenants. Mallinckrodt plc has fully and unconditionally guaranteed the Notes on an unsecured and unsubordinated basis. MIFSA pays interest on the Notes semiannually in arrears on April 15th and October 15th of each year.
In March 2014, in connection with the Cadence Acquisition, MIFSA and Mallinckrodt CB LLC ("MCB"), each a wholly-owned subsidiary of the Company, entered into senior secured credit facilities consisting of a $1.3 billion term loan facility due 2021 ("the March 2014 Term Loan") and a $250.0 million revolving credit facility due 2019 ("the Revolver") (collectively, "the Facilities"). The Facilities are fully and unconditionally guaranteed by Mallinckrodt plc, certain of its direct or indirect wholly-owned U.S. subsidiaries and each of its direct or indirect wholly-owned subsidiaries that owns directly or indirectly any such wholly-owned U.S. subsidiary (collectively, "the Guarantors"). The Facilities contain customary affirmative and negative covenants and are secured by a security interest in certain assets of MIFSA, MCB and the Guarantors. The Facilities bear interest at LIBOR plus a margin based on the

17




Company's total net leverage ratio, and the March 2014 Term Loan is subject to a minimum LIBOR level of 0.75%. Interest payment dates are variable based on the LIBOR rate utilized, but the Company generally expects interest to be payable every 90 days. The March 2014 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal amount of the March 2014 Term Loan payable on the last day of each calendar quarter, which commenced June 30, 2014, with the remaining balance payable on the due date, March 19, 2021. The Revolver contains a $150.0 million letter of credit provision, of which none had been issued as of March 27, 2015. The fee applied to outstanding letters of credit is based on the interest rate applied to borrowings. As of March 27, 2015, the applicable interest rate on outstanding borrowings under the Revolver would have been approximately 2.70%; however, there were no outstanding borrowings. As of March 27, 2015, the applicable interest rate for the March 2014 Term Loan was 3.25% and outstanding borrowings totaled approximately $1.3 billion.
In July 2014, Mallinckrodt Securitization S.À.R.L. ("Mallinckrodt Securitization"), a wholly-owned special purpose subsidiary of the Company, entered into a $160.0 million accounts receivable securitization facility that matures in July 2017 ("the Receivable Securitization"). In January 2015, Mallinckrodt Securitization amended the Receivable Securitization with third-party lenders to increase the borrowing limit from $160.0 million to $250.0 million. The terms of the Receivable Securitization, and the determination of interest rates, were largely unchanged. Mallinckrodt Securitization may, from time to time, obtain up to $250.0 million in third-party borrowings secured by certain receivables, which may be increased to $300.0 million upon approval of the third-party lenders, subject to certain conditions. The Receivable Securitization agreements contain customary representations, warranties and affirmative and negative covenants. Loans under the Receivable Securitization bear interest (including facility fees) at a rate equal to one-month LIBOR plus a margin of 0.80%, and are repaid as required under the limits established by the borrowing base, at maturity or on an interim basis at management's discretion. As of March 27, 2015, the applicable interest rate on outstanding borrowings under the Receivable Securitization was 0.98% and outstanding borrowings totaled $180.0 million.
In August 2014, MIFSA and MCB issued $900.0 million aggregate principal amount of 5.75% senior unsecured notes due August 1, 2022 ("the 2022 Notes"). The 2022 Notes are guaranteed on an unsecured basis by certain of MIFSA's subsidiaries and are subject to an indenture that contains certain customary covenants and events of default. The indenture also allows for early redemption under certain circumstances. MIFSA will pay interest on the 2022 Notes semiannually in arrears on February 1st and August 1st of each year, which commenced on February 1, 2015.
In August 2014, MIFSA and MCB entered into a $700.0 million senior secured term loan facility ("the August 2014 Term Loan"). The August 2014 Term Loan is an incremental tranche under the credit agreement governing the Facilities entered into in March 2014, and has substantially similar terms to the March 2014 Term Loan (other than pricing), including the determination of interest rates and quarterly principal amortization payments equal to 0.25% of the original principal amount of the August 2014 Term Loan. The quarterly principal payments commenced on December 31, 2014, with the remaining balance payable on the due date of March 19, 2021. Mallinckrodt plc and its subsidiaries (other than MIFSA, MCB and the subsidiaries of MIFSA that guarantee the Facilities) will not guarantee the August 2014 Term Loan, and the August 2014 Term Loan will not be secured by the assets of such entities. The August 2014 Term Loan bears interest under substantially similar terms of the March 2014 Term Loan, including the use of LIBOR rates with a minimum floor, except that the margin applied to LIBOR is not dependent upon the Company's total net leverage ratio. At March 27, 2015, the applicable interest rate for the August 2014 Term Loan was 3.50% and outstanding borrowings totaled $698.3 million.
As of March 27, 2015, the Company was, and expects to remain, in compliance with the provisions and covenants associated with its debt agreements.

12.
Retirement Plans
The net periodic benefit cost for the Company's defined benefit pension plans was as follows:
 
Three Months Ended
 
Six Months Ended
 
March 27,
2015
 
March 28,
2014
 
March 27,
2015
 
March 28,
2014
Service cost
$
1.2


$
1.2

 
$
2.4

 
$
2.5

Interest cost
4.4


5.0

 
8.9

 
9.9

Expected return on plan assets
(5.7
)

(6.1
)
 
(11.5
)
 
(12.2
)
Amortization of net actuarial loss
2.4


2.1

 
4.7

 
4.2

Amortization of prior service (credit) cost
(0.2
)

(0.2
)
 
(0.4
)
 
(0.3
)
Plan settlements
1.2

 
0.3

 
1.2

 
0.3

Net periodic benefit cost
$
3.3


$
2.3

 
$
5.3

 
$
4.4



18




The net periodic benefit credit for the Company's postretirement benefit plans for the three months ended March 27, 2015 and March 28, 2014 was $0.5 million and $1.8 million, respectively, and for the six months ended March 27, 2015 and March 28, 2014 was $1.0 million and $3.6 million, respectively. The individual components of the credit were not material.
Net periodic benefit cost (credit) for the Company's defined benefit pension plans and postretirement benefit plans was included within cost of sales and selling, general and administrative expenses on the unaudited condensed consolidated statements of income.
The Company does not anticipate making material involuntary contributions in fiscal 2015, but may elect to make voluntary contributions to its defined benefit pension plans or its postretirement benefit plans during fiscal 2015.


13.
Accumulated Other Comprehensive Income
The following summarizes the change in accumulated other comprehensive income for the six months ended March 27, 2015:
 
Currency Translation
 
Unrecognized Gain (Loss) on Derivatives
 
Unrecognized Gain (Loss) on Benefit Plans
 
Accumulated Other Comprehensive Income
Balance at September 26, 2014
$
131.0

 
$
(6.8
)
 
$
(58.5
)
 
$
65.7

Other comprehensive income before reclassifications
(58.9
)
 

 
(1.3
)
 
(60.2
)
Amounts reclassified from accumulated other comprehensive income

 
0.2

 
2.2

 
2.4

Net current period other comprehensive income (loss)
(58.9
)
 
0.2

 
0.9

 
(57.8
)
Balance at March 27, 2015
$
72.1

 
$
(6.6
)
 
$
(57.6
)
 
$
7.9


The following summarizes reclassifications out of accumulated other comprehensive income for the three and six months ended March 27, 2015:
 
Amount Reclassified from
Accumulated Other Comprehensive Income
 
 
 
Three Months Ended March 27, 2015
 
Six Months Ended March 27, 2015
 
Line Item in the Unaudited Condensed Consolidated
Statement of Income
Amortization of unrealized gain on derivatives
$
0.2

 
$
0.3

 
Interest expense
Income tax provision
(0.1
)
 
(0.1
)
 
Income tax benefit
Net of income taxes
0.1

 
0.2

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

 
4.7

 
(1) 
Prior service credit
(1.2
)
 
(2.3
)
 
(1) 
Plan settlements
1.2

 
1.2

 
 
Total before tax
2.4

 
3.6

 
 
Income tax provision
(0.9
)
 
(1.4
)
 
Income tax benefit
Net of income taxes
1.5

 
2.2

 
 
 
 
 
 
 
 
Total reclassifications for the period
$
1.6

 
$
2.4

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


19




The following summarizes the changes in accumulated other comprehensive income for the six months ended March 28, 2014:
 
Currency Translation
 
Unrecognized Gain (Loss) on Derivatives
 
Unrecognized Gain (Loss) on Benefit Plans
 
Accumulated Other Comprehensive Income
Balance at September 27, 2013
$
158.6

 
$
(7.3
)
 
$
(42.8
)
 
$
108.5

Other comprehensive income before reclassifications
(2.0
)
 

 

 
(2.0
)
Amounts reclassified from accumulated other comprehensive income

 
0.2

 
(0.3
)
 
(0.1
)
Net current period other comprehensive income (loss)
(2.0
)
 
0.2

 
(0.3
)
 
(2.1
)
Balance at March 28, 2014
$
156.6

 
$
(7.1
)
 
$
(43.1
)
 
$
106.4

The following summarizes reclassifications out of accumulated other comprehensive income for the three and six months ended March 28, 2014:
 
Amount Reclassified from
Accumulated Other Comprehensive Income
 
 
 
Three Months Ended March 28, 2014
 
Six Months Ended March 28, 2014
 
Line Item in the Unaudited Condensed Consolidated
Statement of Income
Amortization of unrealized gain on derivatives
$
0.1

 
$
0.3

 
Interest expense
Income tax provision

 
(0.1
)
 
Income tax benefit
Net of income taxes
0.1

 
0.2

 
 
 
 
 
 
 
 
Amortization of pension and post-retirement benefit plans:
 
 
 
 
 
Net actuarial loss
2.1

 
4.2

 
(1) 
Prior service credit
(2.4
)
 
(4.9
)
 
(1) 
Plan settlements
0.3

 
0.3

 
 
Total before tax

 
(0.4
)
 
 
Income tax provision

 
0.1

 
Income tax benefit
Net of income taxes

 
(0.3
)
 
 
 
 
 
 
 
 
Total reclassifications for the period
$
0.1

 
$
(0.1
)
 
 
(1)
These accumulated other comprehensive income components are included in the computation of net periodic benefit cost. See Note 12 for additional details.

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

Sales and Purchases
During the three months ended March 27, 2015 and March 28, 2014, the Company sold inventory to Covidien in the amount of $10.2 million and $11.1 million, respectively, which is included in net sales in the unaudited condensed consolidated statements of income. During the six months ended March 27, 2015 and March 28, 2014, the Company sold inventory to Covidien in the amount of $19.4 million and $23.2 million, respectively. The Company also purchases inventories from Covidien. The Company recognized cost of sales from these inventory purchases of $4.3 million and $9.3 million during the three months ended March 27, 2015 and March 28, 2014, respectively, and $8.8 million and $19.3 million during the six months ended March 27, 2015 and March 28, 2014, respectively.



20




Balance Sheet Impacts
Subsequent to the Separation, the Company and Covidien maintain an ongoing relationship in which each party may provide services to the other party, including the distribution of goods. As a result of these relationships, the unaudited condensed consolidated balance sheets as of March 27, 2015 and September 26, 2014 included $10.9 million and $82.2 million, respectively, of amounts due to the Company from Covidien, within prepaid expenses and other current assets, and $5.4 million and $84.5 million, respectively, of amounts the Company owes Covidien, included within accrued and other liabilities.

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

15.
Guarantees
In disposing of assets or businesses, the Company has historically provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that their ultimate resolution 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 March 27, 2015 and September 26, 2014 was $15.9 million and $16.6 million, respectively, of which $13.1 million and $13.9 million, respectively, related to environmental, health and safety matters. The value of the environmental, health and safety indemnity was measured based on the probability-weighted present value of the costs expected to be incurred to address environmental, health and safety claims made under the indemnity. The aggregate fair value of these indemnification obligations did not differ significantly from their aggregate carrying value at March 27, 2015 and September 26, 2014. As of March 27, 2015, the maximum future payments the Company could be required to make under these indemnification obligations was $71.0 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $19.0 million and $19.4 million remained in other assets on the unaudited condensed consolidated balance sheets at March 27, 2015 and September 26, 2014, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 16. In addition, the Company is liable for product performance; however, the Company believes, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.
The Company is required to provide the U.S. Nuclear Regulatory Commission financial assurance demonstrating its ability to fund the decommissioning of its Maryland Heights, Missouri radiopharmaceuticals production facility upon closure, though the Company does not intend to close this facility. The Company has provided this financial assurance in the form of a $57.2 million surety bond.
In addition, as of March 27, 2015, the Company had a $21.1 million letter of credit to guarantee decommissioning costs associated with its Saint Louis, Missouri plant, though it does not intend to close this facility. As of March 27, 2015, the Company had various other letters of credit and guarantee and surety bonds totaling $38.4 million.
In addition, the separation and distribution agreement entered into with Covidien at the Separation provides for cross-indemnities principally designed to place financial responsibility of the obligations and liabilities of the Company's business with the Company and financial responsibility for the obligations and liabilities of Covidien's remaining business with Covidien, among other indemnities.

21





16.
Commitments and Contingencies
The Company is subject to various legal proceedings and claims, including patent infringement claims, product liability matters, environmental matters, employment disputes, contractual disputes and other commercial disputes, including those described below. The Company believes that these legal proceedings and claims likely will be resolved over an extended period of time. Although it is not feasible to predict the outcome of these matters, the Company believes, unless indicated below, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.

Governmental Proceedings
On November 30, 2011 and October 22, 2012, the Company received subpoenas from the U.S. Drug Enforcement Administration requesting production of documents relating to its suspicious order monitoring program.
On September 24, 2012, Questcor received a subpoena from the United States Attorney's Office ("the USAO") for the Eastern District of Pennsylvania for information relating to its promotional practices. Questcor has also been informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC are also participating in the investigation to review Questcor's promotional practices and related matters.
On June 11, 2014, Questcor received a subpoena and Civil Investigative Demand ("CID") from the Federal Trade Commission ("FTC") seeking documentary materials and information regarding the FTC's investigation into whether Questcor's acquisition of certain rights to develop, market, manufacture, distribute, sell and commercialize Synacthen Depot® from Novartis AG and Novartis Pharma AG (collectively, "Novartis") violates antitrust laws.
In late November 2014, the Company received a CID from the Civil Medicaid Fraud Division of the Texas Attorney General's Office. According to the CID, the Attorney General's office is investigating the possibility of false reporting of information by the Company regarding the prices of certain of its drugs used by Texas Medicaid to establish reimbursement rates for pharmacies that dispensed the Company's drugs to Texas Medicaid recipients.
The Company is in the process of responding to each of the subpoenas and CIDs and intends to cooperate fully in each investigation.
Mallinckrodt Inc. v. U.S. Food and Drug Administration and United States of America. The Company filed a Complaint for Declaratory and Injunctive Relief in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States of America on November 17, 2014 for judicial review of what the Company believes is the FDA's inappropriate and unlawful reclassification of the Company's Methylphenidate HCl Extended-Release tablets USP (CII) ("Methylphenidate ER") in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("Orange Book") on November 13, 2014. In its complaint, the Company has asked the court to: issue an injunction to (a) set aside the FDA's reclassification of the Company's Methylphenidate ER products from freely substitutable at the pharmacy level (class AB) to presumed to be therapeutically inequivalent (class BX) in the Orange Book and (b) prohibit the FDA from reclassifying the Company's Methylphenidate ER products in the future without following applicable legal requirements; and issue a declaratory judgment that the FDA's action reclassifying the Company's Methylphenidate ER products in the Orange Book is unlawful. The Company concurrently filed a motion with the same court requesting an expedited hearing to issue a temporary restraining order ("TRO") directing the FDA to reinstate the Orange Book AB rating for the Company's Methylphenidate ER products on a temporary basis. At a hearing held on November 25, 2014, the court denied the Company's motion for a TRO. On December 23, 2014, the FDA filed a motion to dismiss the Compliant with the district court. The Company filed its opposition to the motion to dismiss on January 9, 2015, and concurrently filed a motion for summary judgment.

Patent/Antitrust Litigation
Tyco Healthcare Group LP, et al. v. Mutual Pharmaceutical Company, Inc. In March 2007, the Company filed a patent infringement suit in the U.S. District Court for the District of New Jersey against Mutual Pharmaceutical Co., Inc., et al. (collectively, "Mutual") after Mutual submitted an Abbreviated New Drug Application ("ANDA") to the FDA seeking to sell a generic version of the Company's 7.5mg RESTORIL™ sleep aid product. Mutual also filed antitrust and unfair competition counterclaims. The patents at issue have since expired or been found invalid. On January 18, 2013, the trial court issued an opinion and order granting the Company's motion for summary judgment regarding Mutual's antitrust and unfair competition counterclaims. On May 1, 2013, Mutual appealed this decision to the U.S. Court of Appeals for the Federal Circuit and on August 6, 2014, the Federal Circuit issued a split decision, affirming the trial court in part and remanding to the trial court certain counterclaims for further proceedings. In December 2014, the Company filed a motion for summary judgment with the U.S. District Court regarding the remanded issues.

22




'222 and '218 Patent Litigation: Exela Pharma Sciences, LLC. In August 2011, Cadence, a subsidiary of the Company, and Pharmatop, the owner of the two U.S. patents licensed exclusively by Cadence, filed suit in the U.S. District Court for the District of Delaware against Exela Pharma Sciences, LLC, Exela PharmaSci, Inc. and Exela Holdings, Inc. (collectively, "Exela"), alleging that Exela infringed U.S. Patent Nos. 6,028,222 ("the '222 patent") and 6,992,218 ("the '218 patent") by submitting an ANDA to the FDA seeking to sell a generic version of Ofirmev. The filing of the lawsuit triggered a stay of FDA approval of the Exela ANDA until the earlier of the expiration of a 30-month period, the expiration of the '222 and '218 patents, the entry of a settlement order or consent decree stating that the '222 and '218 patents are invalid or not infringed, a decision in the case concerning infringement or validity that is favorable to Exela, or such shorter or longer period as the court may order. After a bench trial, the court ruled in favor of Cadence in November 2013 and found that Exela's ANDA infringed the '222 and '218 patents. On December 20, 2013, Exela appealed the decision and oral arguments in the appeal occurred on November 7, 2014. In March 2015, the Federal Circuit affirmed the district court decision.
'222 and '218 Patent Litigation: InnoPharma Licensing LLC and InnoPharma, Inc. In September 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against InnoPharma Licensing LLC and InnoPharma, Inc. (collectively "InnoPharma") following receipt of an August 2014 notice from InnoPharma concerning its submission of a New Drug Application ("NDA"), containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev.
'222 and '218 Patent Litigation: Agila Specialties Private Limited, Inc. and Agila Specialties Inc. (a Mylan Inc. Company), (collectively "Agila"). In December 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against Agila following receipt of a November 2014 notice from Agila concerning its submission of a NDA containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. 
The Company intends to vigorously enforce its intellectual property rights relating to Ofirmev to prevent the marketing of infringing generic or competing products prior to the expiration of the Cadence patents. An adverse outcome in either the Exela, InnoPharma or Agila matters ultimately could result in the launch of one or more generic versions of Ofirmev before the expiration of the last of the listed patents on June 6, 2021 (or December 6, 2021 if pediatric exclusivity is granted), which could adversely affect the Company's ability to successfully maximize the value of Ofirmev and have an adverse effect on its financial condition, results of operations and cash flows.
'222 and '218 Patents: Ex Parte Reexamination. In September 2012, Exela filed with the U.S. Patent and Trademark Office ("USPTO") a Request for Ex Parte Reexamination of the '222 patent and the USPTO granted that request. The reexamination process requires the USPTO to consider the scope and validity of the patent based on substantial new questions of patentability raised by a third-party or the USPTO. Cadence and Pharmatop have filed, with the USPTO, a patent owner's statement commenting on the reexamination request, and thereafter the parties made various submissions. In March 2015, the USPTO issued an ex parte reexamination certificate for the '222 patent listing the claims that resulted from the reexamination proceeding.
In addition, in January 2014, an unidentified third-party filed, with the USPTO, a Request for Ex Parte Reexamination of the '218 patent. The reexamination request was granted on March 14, 2014. In July 2014, the USPTO issued a Non-Final Office Action in the '218 reexamination in which it rejected certain claims. In September 2014, Cadence and Pharmatop filed an Amendment and Response to the Office Action. Cadence and Pharmatop filed a supplemental response in January 2015.
All of the claims of the '218 patent remain valid and in force during the reexamination proceeding. Because the Company and Pharmatop believe that the scope and validity of the patent claims in the '222 reexamination certificate and the '218 patent are appropriate and that the USPTO's prior issuances of the patents were correct, the Company, in conjunction with Pharmatop, will vigorously defend these patents. It is not possible at this time to determine with certainty whether the Company will ultimately succeed in maintaining the full scope and validity of the claims of the '218 patent during reexamination. If any of the patent claims in the '218 patent ultimately are narrowed during prosecution before the USPTO, the extent of the patent coverage afforded to Ofirmev could be impaired, which could have a material adverse effect on the Company's financial condition, results of operations and cash flows.
'218 Patent Litigation: Exela Pharma Sciences, LLC. In April 2012, Exela filed suit against David J. Kappos and the USPTO in the U.S. District Court for the Eastern District of Virginia for declaratory judgment seeking a reversal of the USPTO's decision not to act on a petition by Exela to vacate the USPTO's April 2003 order reviving the international application for the '218 patent. The lawsuit followed the USPTO's rejection of Exela's petition to the USPTO filed in November 2011, which sought to vacate the April 2003 order. The USPTO determined that Exela lacked standing to seek such relief. Exela also seeks declaratory judgment that the USPTO's rules and regulations that allow for revival of abandoned, international patent applications under the "unintentional" standard are invalid, and seeks similar relief in connection with one or more counterclaims it has filed in the Delaware litigation. Cadence intervened in this lawsuit and in December 2012, the district court dismissed the case with prejudice as barred by the applicable statute of limitations. In February 2013, Exela appealed the dismissal to the Court of Appeals for the Federal Circuit and oral arguments were held in February 2014. In March 2015, the Federal Circuit affirmed the district court's dismissal of the Exela complaint.


23




'222 and '218 Patent Litigation Settlements. Four other similar cases involving generic and/or competing versions of Ofirmev have previously settled. In each settlement, the defendant was granted the non-exclusive right to market a generic intravenous acetaminophen product in the U.S. under its respective ANDA after December 6, 2020, or earlier under certain circumstances. In connection with those settlements, one settling party was granted the exclusive right of first refusal to negotiate an agreement with Cadence to market an authorized generic of Ofirmev in the U.S. in the event that Cadence elects to launch an authorized generic version of the product. If that settling party elects not to exercise its right of first refusal, Cadence has agreed to grant a similar right of first refusal to another settling party. As part of another settlement, Cadence entered into a supply agreement under which an affiliate of one of the settling parties will develop, manufacture and supply commercial quantities of Ofirmev to the Company if certain regulatory approvals are obtained.

Commercial and Securities Litigation
Retrophin Litigation. In January 2014, Retrophin, Inc. filed a lawsuit against Questcor in the U.S. District Court for the Central District of California, alleging a variety of federal and state antitrust violations based on Questcor's acquisition from Novartis of certain rights to develop, market, manufacture, distribute, sell and commercialize Synacthen. Discovery has commenced, and the court set October 30, 2015 as the deadline for filing dispositive motions.
Glenridge Litigation. In June 2011, Glenridge Pharmaceuticals, LLC ("Glenridge"), filed a lawsuit against Questcor in the Superior Court of California, Santa Clara County, alleging that Questcor had underpaid royalties to Glenridge under a royalty agreement related to net sales of Acthar. In August 2012, Questcor filed a separate lawsuit against the three principals of Glenridge, as well as Glenridge, challenging the enforceability of the royalty agreement. In August 2013, the lawsuits were consolidated into one case in the Superior Court of California, Santa Clara County. On October 29, 2014, the parties entered into a binding term sheet settling the lawsuit. Under the terms of the settlement, the royalty rate payable by Questcor was reduced, royalties were capped instead of being payable for so long as Acthar was sold and Questcor agreed to pay Glenridge a reduced amount in satisfaction of royalties Questcor had previously accrued but not paid during the course of the lawsuit. In February 2015, the settlement agreement was finalized, with terms consistent with the October 2014 term sheet.
Putative Class Action Securities Litigation. On September 26, 2012, a putative class action lawsuit was filed against Questcor and certain of its officers and directors in the U.S. District Court for the Central District of California, captioned John K. Norton v. Questcor Pharmaceuticals, et al., No. SACvl2-1623 DMG (FMOx). The complaint purports to be brought on behalf of shareholders who purchased Questcor common stock between April 26, 2011 and September 21, 2012. The complaint generally alleges that Questcor and certain of its officers and directors engaged in various acts to artificially inflate the price of Questcor stock and enable insiders to profit through stock sales. The complaint asserts that Questcor and certain of its officers and directors violated sections l0(b) and/or 20(a) of the Securities Exchange Act of 1934, as amended ("the Exchange Act"), by making allegedly false and/or misleading statements concerning the clinical evidence to support the use of Acthar for indications other than infantile spasms, the promotion of the sale and use of Acthar in the treatment of multiple sclerosis and nephrotic syndrome, reimbursement for Acthar from third-party insurers, and Questcor's outlook and potential market growth for Acthar. The complaint seeks damages in an unspecified amount and equitable relief against the defendants. This lawsuit has been consolidated with four subsequently-filed actions asserting similar claims under the caption: In re Questcor Securities Litigation, No. CV 12-01623 DMG (FMOx). On October 1, 2013, the District Court granted in part and denied in part Questcor's motion to dismiss the consolidated amended complaint. On October 29, 2013, Questcor filed an answer to the consolidated amended complaint and fact discovery was concluded in January 2015. In April 2015, the parties executed a long-form settlement agreement, under the terms of which Questcor agreed to pay $38.0 million to resolve the plaintiff's claims, inclusive of all fees and costs. Questcor and the individual defendants maintain that the plaintiffs' claims are without merit, and have entered into the settlement to eliminate the uncertainties, burden and expense of further protracted litigation. During the three months ended March 27, 2015, the Company established a $38.0 million reserve for this settlement. The settlement is subject to a number of conditions, including, among other things, final court approval following notice to the class.
Federal Shareholder Derivative Litigation. On October 4, 2012, another alleged shareholder filed a derivative lawsuit in the U.S. District Court for the Central District of California captioned Gerald Easton v. Don M. Bailey, et al., No. SACV12-01716 DOC (JPRx). The suit asserts claims substantially identical to those asserted in the do Valle derivative action, described below, against the same defendants. This lawsuit has been consolidated with five subsequently-filed actions asserting similar claims under the caption: In re Questcor Shareholder Derivative Litigation, CV 12- 01716 DMG (FMOx). Following the resolution of the motion to dismiss in the consolidated putative securities class action, the court issued an order staying the federal derivative action until the earlier of: (a) 60 days after the resolution of any motion for summary judgment filed in the putative class action lawsuit, (b) 60 days after the deadline to file a motion for summary judgment in the putative class action lawsuit, if none is filed, or (c) the execution of any settlement agreement (including any partial settlement agreement) to resolve the putative class action lawsuit.



24




State Shareholder Derivative Litigation. On October 2, 2012, an alleged shareholder filed a derivative lawsuit purportedly on behalf of Questcor against certain of its officers and directors in the Superior Court of the State of California, Orange County, captioned Monika do Valle v. Virgil D. Thompson, et al., No. 30-2012-00602258-CU-SL-CXC. The complaint asserted claims for breach of fiduciary duty, abuse of control, mismanagement and waste of corporate assets arising from substantially similar allegations as those contained in the putative securities class action described above, as well as from allegations relating to sales of Questcor common stock by the defendants and repurchases of Questcor common stock. The complaint sought an unspecified sum of damages and equitable relief. On October 24, 2012, another alleged shareholder filed a derivative lawsuit purportedly on behalf of Questcor against certain of its officers and directors in the Superior Court of the State of California, Orange County, captioned Jones v. Bailey, et al., Case No. 30-2012-00608001-CU-MC-CXC. The suit asserted claims substantially identical to those asserted in the do Valle derivative action. On February 19, 2013, the court issued an order staying the state derivative actions until the putative federal securities class action and federal derivative actions are resolved. On May 17, 2014, the court granted plaintiffs' request for dismissal without prejudice of the Jones action. On November 18, 2014, the do Valle matter was voluntarily dismissed.
Put Options Securities Action. In March 2013, individual traders of put options filed a securities complaint in the U.S. District Court for the Central District of California captioned David Taban, et al. v. Questcor Pharmaceuticals, Inc., No. SACV13-0425. The complaint generally asserts claims against Questcor and certain of its officers and directors for violations of the Exchange Act and for state law fraud and fraudulent concealment based on allegations similar to those asserted in the putative securities class action described above. The complaint seeks compensatory and punitive damages of an unspecified amount. Following the resolution of the motion to dismiss in the consolidated putative securities class action, the court issued an order staying this action until the earlier of: (a) 60 days after the resolution of any motion for summary judgment filed in the putative class action lawsuit, (b) 60 days after the deadline to file a motion for summary judgment in the putative class action lawsuit, if none is filed, or (c) the execution of any settlement agreement (including any partial settlement agreement) to resolve the putative class action lawsuit. The case remains stayed.

Pricing Litigation
State of Utah v. Apotex Corp., et al. The Company, along with numerous other pharmaceuticals companies, is a defendant in this matter which was filed May 8, 2008, and is pending in the Third Judicial Circuit of Salt Lake County, Utah. The State of Utah alleges, generally, that the defendants reported false pricing information in connection with certain drugs that are reimbursable under Utah Medicaid, resulting in overpayment by Utah Medicaid for those drugs, and is seeking monetary damages and attorneys' fees. The Company believes that it has meritorious defenses to these claims and is vigorously defending against them. While it is not possible at this time to determine with certainty the outcome of the case, the Company believes, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.

Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of March 27, 2015, it was probable that it would incur remedial costs in the range of $45.8 million to $118.7 million. The Company also concluded that, as of March 27, 2015, the best estimate within this range was $82.4 million, of which $3.4 million was included in accrued and other current liabilities and the remainder was included in environmental liabilities on the unaudited condensed consolidated balance sheet at March 27, 2015.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. The Company is a successor in interest to International Minerals and Chemicals Corporation ("IMC"). Between 1967 and 1982, IMC leased portions of the Additional and Uncharacterized Sites ("AUS") Operable Unit at the Crab Orchard Superfund Site ("the Site") from the government and manufactured various explosives for use in mining and other operations. In March 2002, the Department of Justice, the U.S. Department of the Interior and the U.S. Environmental Protection Agency ("EPA") (together, "the Government Agencies") issued a special notice letter to General Dynamics Ordnance and Tactical Systems, Inc. ("General Dynamics"), one of the other potentially responsible parties ("PRPs") at the Site, to compel General Dynamics to perform the remedial investigation and feasibility study ("RI/FS") for the AUS Operable Unit. General Dynamics negotiated an Administrative Order on Consent ("AOC") with the Government Agencies to conduct an extensive RI/FS at the Site under the direction of the U.S. Fish and Wildlife Service. General Dynamics asserted in August 2004 that the Company is jointly and severally liable, along with approximately eight other lessees and operators at the AUS Operable Unit, for alleged contamination of soils and groundwater resulting from historic operations, and has threatened to file a contribution claim against the Company and other parties for recovery of its costs incurred in connection with the RI/FS activities being conducted at the AUS Operable Unit. The Company and other PRPs who received demand letters from General Dynamics have explored settlement alternatives, but have not reached settlement to date. In February 2015, the U.S. Fish and Wildlife Service approved General Dynamics' RI. Work has not yet commenced on the FS. The Company, General Dynamics and other PRPs are discussing the initiation of formal PRP negotiations to address resolution of these alleged claims. While it is not possible at this time to determine with

25




certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Mallinckrodt Veterinary, Inc., Millsboro, Delaware. The Company previously operated a plant in Millsboro, Delaware ("the Millsboro Site") that manufactured various animal healthcare products. In 2005, the Delaware Department of Natural Resources and Environmental Control found trichloroethylene ("TCE") in the Millsboro public water supply at levels that exceeded the federal drinking water standards. Further investigation to identify the TCE plume in the ground water indicated that the plume has extended to property owned by a third-party near the Millsboro Site. The Company, and another former owner, assumed responsibility for the Millsboro Site cleanup under the Alternative Superfund Program administered by the EPA. The Company and another PRP have entered into two AOCs with the EPA to perform investigations to abate, mitigate or eliminate the release or threat of release of hazardous substances at the Millsboro Site and to conduct an Engineering Evaluation/Cost Analysis ("EE/CA") to characterize the nature and extent of the contamination. A draft EE/CA was submitted to the EPA in December 2014. The Company, along with the other party, continues to conduct studies and prepare remediation plans in accordance with the AOCs. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Coldwater Creek, Saint Louis County, Missouri. The Company is named as a defendant in numerous tort complaints filed in and subsequent to February 2012 with numerous plaintiffs pending in the U.S. District Court for the Eastern District of Missouri. These cases allege personal injury for alleged exposure to radiological substances, including in Coldwater Creek in Missouri, and in the air. Plaintiffs allegedly lived in various locations in Saint Louis County, Missouri near Coldwater Creek. Radiological residues which may have been present in the creek have been remediated by the U.S. Army Corps of Engineers. The Company believes that it has meritorious defenses to these complaints and is vigorously defending against them. The Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) the proceedings are in early stages; (ii) the Company has not received and reviewed complete information regarding the plaintiffs and their medical conditions; and (iii) there are significant factual issues to be resolved. While it is not possible at this time to determine with certainty the ultimate outcome of these cases, the Company believes, given the information currently available, that the ultimate resolution of all known claims will not have a material adverse effect on its financial condition, results of operations and cash flows.
Lower Passaic River, New Jersey. The Company and approximately 60 other companies comprise the Lower Passaic Cooperating Parties Group ("the CPG") and are parties to a May 2007 AOC with the EPA to perform a RI/FS of the 17-mile stretch known as the Lower Passaic River Study Area ("the River"). The Company's potential liability stems from former operations at Lodi and Belleville, New Jersey. In June 2007, the EPA issued a draft Focused Feasibility Study ("FFS") that considered interim remedial options for the lower 8-miles of the river, in addition to a "no action" option. As an interim step related to the 2007 AOC, the CPG voluntarily entered into an AOC on June 18, 2012 with the EPA for remediation actions focused solely at mile 10.9 of the River. The Company's estimated costs related to the RI/FS and focused remediation at mile 10.9, based on interim allocations, are immaterial and have been accrued.
In April 2014, the EPA issued its revised FFS, with remedial alternatives to address cleanup of the lower 8-mile stretch of the River, which also included a "no action" option. The EPA estimates the cost for the remediation alternatives range from $365.0 million to $3.2 billion. The EPA's preferred approach would involve bank-to-bank dredging of the lower 8-mile stretch of the River and installing an engineered cap at a discounted, estimated cost of $1.7 billion. Based on the issuance of the EPA's revised FFS, the Company recorded a $23.1 million accrual in the second quarter of fiscal 2014 representing the Company's estimate of its allocable share of the joint and several remediation liability resulting from this matter.
In April 2015, the CPG presented a draft of the RI/FS of the River to the EPA. The CPG's RI/FS included alternatives that ranged from "no action," targeted remediation of the entire 17-mile stretch of the River to remedial actions consistent with the EPA's preferred approach for the lower 8-miles stretch of the River and also included remediation alternatives for the upper 9-mile stretch of the River. The discounted cost estimates for the CPG remediation alternatives range from $483.4 million to $2.7 billion. The Company recorded an additional charge of $13.3 million in the second quarter of fiscal 2015 based on the Company's estimate of its allocable share of the joint and several remediation liability resulting from this matter.
Despite the issuance of the revised FFS by the EPA and the RI/FS by the CPG, there are many uncertainties associated with the final agreed-upon remediation and the Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company is ultimately responsible and will be refined as events in the remediation process occur.

Products Liability Litigation
Beginning with lawsuits brought in July 1976, the Company is also named as a defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of products containing asbestos. A limited number of the cases allege premises liability based on claims

26




that individuals were exposed to asbestos while on the Company's property. Each case typically names dozens of corporate defendants in addition to the Company. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos. The Company's involvement in asbestos cases has been limited because it did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims have never been substantiated and have been dismissed by the courts. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims and intends to continue to defend these lawsuits. When appropriate, the Company settles claims; however, amounts paid to settle and defend all asbestos claims have been immaterial. As of March 27, 2015, there were approximately 12,000 asbestos-related cases pending against the Company.
The Company estimates pending asbestos claims and claims that were incurred but not reported and related insurance recoveries, which are recorded on a gross basis in the unaudited condensed consolidated balance sheets. The Company's estimate of its liability for pending and future claims is based on claims experience over the past five years and covers claims either currently filed or expected to be filed over the next seven years. The Company believes that it has adequate amounts recorded related to these matters. While it is not possible at this time to determine with certainty the ultimate outcome of these asbestos-related proceedings, the Company believes, given the information currently available, that the ultimate resolution of all known and anticipated future claims, after taking into account amounts already accrued, along with recoveries from insurance, will not have a material adverse effect on its financial condition, results of operations and cash flows.

Asset Retirement Obligations
The Company has recorded asset retirement obligations for the estimated future costs primarily associated with legal obligations to decommission facilities within the Global Medical Imaging segment, including the facilities located in Petten, the Netherlands and Maryland Heights, Missouri. Substantially all of these obligations are included in other liabilities on the unaudited condensed consolidated balance sheets. The following table provides a summary of the changes in the Company's asset retirement obligations:
Balance at September 26, 2014
$
40.8

Accretion expense
0.9

Currency translation
(3.7
)
Balance at March 27, 2015
$
38.0


The Company believes, given the information currently available, that any potential payment of such estimated amounts will not have a material adverse effect on its financial condition, results of operations and cash flows.

Industrial Revenue Bonds
Through March 27, 2015, primarily in prior fiscal years, the Company exchanged title to $27.4 million of its plant assets in return for an equal amount of Industrial Revenue Bonds ("IRB") issued by Saint Louis County. The Company also simultaneously leased such assets back from Saint Louis County under a capital lease expiring in December 2025, the terms of which provide it with the right of offset against the IRBs. The lease also provides an option for the Company to repurchase the assets at the end of the lease for nominal consideration. These transactions collectively result in a ten-year property tax abatement from the date the property is placed in service. Due to the right of offset, the capital lease obligation and IRB asset are recorded net in the unaudited condensed consolidated balance sheets. The Company expects that the right of offset will be applied to payments required under these arrangements.

Interest Bearing Deferred Tax Obligation
As part of the integration of Questcor, the Company entered into an internal installment sale transaction related to certain Acthar intangible assets during the six months ended March 27, 2015. The installment sale transaction resulted in a taxable gain. In accordance with Internal Revenue Code Section 453 the gain is considered taxable in the period in which installment payments are received. As of March 27, 2015, the Company had an aggregate $1,551.0 million of interest bearing U.S. deferred tax liabilities associated with outstanding installment notes. The U.S. Internal Revenue Service ("IRS") charges interest based on the deferred tax liability outstanding as of the end of a company's fiscal year, regardless of amounts outstanding during the fiscal year. During the three and six months ended March 27, 2015 the Company accrued Section 453 interest of $11.4 million and $14.2 million, respectively, which is included within interest expense in the unaudited condensed consolidated statements of income.



27




Tax Matters
The income tax returns of the Company and its subsidiaries are periodically examined by various tax authorities. The resolution of these matters is subject to the conditions set forth in the tax matters agreement entered into between the Company and Covidien ("the Tax Matters Agreement"). Covidien has the right to administer, control and settle all U.S. income tax audits for periods prior to the Separation. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that established liabilities are reasonable and that the ultimate resolution of these matters will not have a material adverse effect on its financial condition, results of operations and cash flows.
With respect to certain tax returns filed by predecessor affiliates of the Company and Covidien, the IRS has concluded its field examination for the years 1997 through 2009. The Company considers such uncertain tax positions associated with these years as having been effectively settled. All but one of the matters associated with these audits have been resolved. The unresolved proposed adjustment asserts that substantially all of the predecessor affiliates' intercompany debt originating during the years 1997 through 2000 should not be treated as debt for U.S. federal income tax purposes, and has disallowed interest deductions related to the intercompany debt and certain tax attribute adjustments recognized on the U.S. income tax returns. This matter is subject to the Company's $200.0 million liability limitation for periods prior to September 29, 2012, as prescribed in the Tax Matters Agreement.
Prior to the Separation, the Company provided and accrued for an indemnification, to the purchaser of a certain legal entity, to indemnify them for tax obligations should the tax basis of certain assets not be recognized. The Company believes that, under the terms of the agreement between the parties, this indemnification obligation has expired. As such, the Company eliminated this liability and recorded a $22.5 million benefit within discontinued operations within the unaudited condensed consolidated statement of income.

Acquisition-Related Litigation
Several purported class action lawsuits were filed in February 2014 and March 2014 by purported holders of Cadence common stock in connection with the Cadence Acquisition, including in the Delaware Court of Chancery (consolidated under the caption In re Cadence Pharmaceuticals, Inc. Stockholders Litigation), and in California State Court, San Diego County (Denny v. Cadence Pharmaceuticals, Inc., et al., Militello v. Cadence Pharmaceuticals, Inc., et al., and Schuon v. Cadence Pharmaceuticals, Inc., et al.). The actions bring claims against, and generally allege that, the board of directors of Cadence breached their fiduciary duties in connection with the Cadence Acquisition by, among other things, failing to maximize shareholder value, and the Delaware and Schuon actions further allege that Cadence omitted to disclose allegedly material information in its Schedule 14D-9. The lawsuits also allege, among other things, that the Company aided and abetted the purported breaches of fiduciary duty. The lawsuits seek various forms of relief, including but not limited to, rescission of the transaction, damages and attorneys' fees and costs. On March 7, 2014, following expedited discovery, the parties in the consolidated Delaware action entered into a Memorandum of Understanding ("MOU"), which sets forth the parties' agreement in principle for a settlement of those actions. The settlement was memorialized in a formal Stipulation and Settlement and Release in March 2015, and includes among other things, a release of all claims relating to the Cadence Acquisition as set forth in the Stipulation. The settlement is subject to a number of conditions, including, among other things, final court approval following notice to the class. A final fairness hearing is scheduled for June 2015, before the Delaware Court. There have been no substantive proceedings in any of the California actions. On July 29, 2014, the Militello case was voluntarily dismissed without prejudice. On September 8, 2014, the Denny case was voluntarily dismissed without prejudice.
Since the announcement of the merger with Questcor on April 7, 2014, several putative class actions have been filed by purported holders of Questcor common stock in connection with the Questcor Acquisition (Hansen v. Thompson, et al., Heng v. Questcor Pharmaceuticals, Inc., et al., Buck v. Questcor Pharmaceuticals, Inc., et al., Ellerbeck v. Questcor Pharmaceuticals, Inc., et al., Yokem v. Questcor Pharmaceuticals, Inc., et al., Richter v. Questcor Pharmaceuticals, Inc., et al., Tramantano v. Questcor Pharmaceuticals, Inc., et al., Crippen v. Questcor Pharmaceuticals, Inc., et al., Patel v. Questcor Pharmaceuticals, Inc., et al., and Postow v. Questcor Pharmaceuticals, Inc., et al.). The actions were consolidated on June 3, 2014. The consolidated complaint names as defendants, and generally alleges that, the directors of Questcor breached their fiduciary duties in connection with the acquisition by, among other things, agreeing to sell Questcor for inadequate consideration and pursuant to an inadequate process. The consolidated complaint also alleges that the Questcor directors breached their fiduciary duties by failing to disclose purportedly material information to shareholders in connection with the merger. The consolidated complaint also alleges, among other things, that the Company aided and abetted the purported breaches of fiduciary duty. The lawsuits seek various forms of relief, including but not limited to, rescission of the transaction, damages and attorneys' fees and costs.
On July 29, 2014, the defendants reached an agreement in principle with the plaintiffs in the consolidated actions, and that agreement is reflected in a MOU. In connection with the settlement contemplated by the MOU, Questcor agreed to make certain additional disclosures related to the proposed transaction with the Company, which are contained in the Company's Current Report on Form 8-K filed with the SEC on July 30, 2014. Additionally, as part of the settlement and pursuant to the MOU, the Company agreed to forbear from exercising certain rights under the merger agreement with Questcor, as follows: the four business day period referenced in Section 5.3(e) of the merger agreement with Questcor was reduced to three business days. Consistent with the terms of the MOU, the parties entered into a formal Stipulation of Settlement in February 2015.

28




The stipulation of settlement is subject to customary conditions, including court approval. If the settlement is finally approved by the court, it will resolve and release all claims in all actions that were or could have been brought challenging any aspect of the transaction, the merger agreement with Questcor and any disclosures made in connection therewith, including the definitive joint proxy statement/prospectus relating to the Questcor Acquisition, pursuant to terms that will be disclosed to shareholders prior to final approval of the settlement. There can be no assurance that the California Superior Court will approve the settlement. In such event, the proposed settlement as contemplated by the MOU may be terminated.
While it is not possible at this time to determine with certainty the ultimate outcomes of these matters, the Company believes, unless indicated above, given the information currently available, that their ultimate resolution will not have a material adverse effect on its financial condition, results of operations and cash flows.

Other Matters
The Company is a defendant in a number of other pending legal proceedings relating to present and former operations, acquisitions and dispositions. The Company does not expect the outcome of these proceedings, either individually or in the aggregate, to have a material adverse effect on its financial condition, results of operations and cash flows.

17.
Financial Instruments and Fair Value Measurements
Fair value is defined as the exit price that would be received from the sale of an asset or paid to transfer a liability, using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy are as follows:

Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;
Level 2— significant other observable inputs that are observable either directly or indirectly; and
Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.

The following tables provide a summary of the significant assets and liabilities that are measured at fair value on a recurring basis at the end of each period:

March 27,
2015

Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)

Significant Unobservable Inputs
(Level 3)
Assets:








Debt and equity securities held in rabbi trusts
$
36.8

 
$
25.0

 
$
11.8

 
$

Foreign exchange forward and option contracts
0.3

 
0.3

 

 

 
$
37.1

 
$
25.3

 
$
11.8

 
$


 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Deferred compensation liabilities
$
19.1

 
$

 
$
19.1

 
$

Contingent consideration and acquired contingent liabilities
198.2

 

 

 
198.2

Foreign exchange forward and option contracts
5.4

 
5.4

 

 


$
222.7

 
$
5.4

 
$
19.1

 
$
198.2



29




 
September 26,
2014
 
Quoted Prices in Active Markets for Identical Assets
(Level 1)
 
Significant Other Observable Inputs
(Level 2)
 
Significant Unobservable Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Debt and equity securities held in rabbi trusts
$
35.7

 
$
22.9

 
$
12.8

 
$

 
$
35.7

 
$
22.9

 
$
12.8

 
$