UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _________________________________
FORM 10-Q
 _________________________________
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 29, 201728, 2018
or
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 


Commission File Number : 001-35803
 _________________________________
Mallinckrodt public limited companyplc
(Exact name of registrant as specified in its charter)
 _________________________________
Ireland 98-1088325
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
3 Lotus Park, The Causeway, Staines-Upon-Thames,
Surrey TW18 3AG, United Kingdom
(Address of principal executive offices) (Zip Code)


Telephone: +44 017 8463 6700
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x     No o


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


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


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


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


Indicate number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
Ordinary shares, $0.20 par value - 95,004,91283,313,240 shares as of November 3, 20172, 2018







MALLINCKRODT PLC
INDEX
 
  Page
   
 
 
 
 
 
 
 
 
   
 
   















PART I. FINANCIAL INFORMATION
 
Item 1.Financial Statements.


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


Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 29,
2017
 September 30,
2016
 September 29,
2017
 September 30,
2016
September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Net sales$793.9
 $887.2
 $2,429.3
 $2,569.6
$640.0
 $600.6
 $1,844.3
 $1,760.7
Cost of sales393.3
 397.0
 1,194.0
 1,165.5
326.2
 268.0
 936.7
 808.3
Gross profit400.6
 490.2
 1,235.3
 1,404.1
313.8
 332.6
 907.6
 952.4
              
Selling, general and administrative expenses205.7
 267.8
 745.9
 702.0
164.0
 186.3
 520.7
 618.5
Research and development expenses59.5
 67.9
 190.9
 200.8
78.5
 46.9
 223.9
 144.2
Restructuring charges, net14.3
 6.8
 32.1
 29.2
14.7
 15.4
 96.5
 26.3
Non-restructuring impairment charges
 
 
 16.9
Losses (gains) on divestiture and license0.4
 
 (56.6) 
Losses (gains) on divestiture0.6
 0.4
 0.6
 (56.6)
Operating income120.7
 147.7
 323.0
 455.2
56.0
 83.6
 65.9
 220.0
              
Interest expense(92.6) (94.0) (279.0) (286.8)(93.6) (92.6) (280.1) (279.0)
Interest income1.3
 0.5
 2.8
 1.1
2.0
 1.3
 6.6
 2.8
Other income (expense), net3.7
 (0.6) 6.2
 (2.6)13.4
 3.0
 17.5
 (70.6)
Income from continuing operations before income taxes33.1
 53.6
 53.0
 166.9
Loss from continuing operations before income taxes(22.2) (4.7) (190.1) (126.8)
              
Income tax benefit(31.2) (56.4) (110.8) (218.3)(125.2) (57.8) (222.0) (153.4)
Income from continuing operations64.3
 110.0
 163.8
 385.2
103.0
 53.1
 31.9
 26.6
              
(Loss) income from discontinued operations, net of income taxes(0.6) 5.0
 361.9
 47.4
Income from discontinued operations, net of income taxes10.8
 10.6
 79.5
 499.1
              
Net income$63.7
 $115.0
 $525.7
 $432.6
$113.8
 $63.7
 $111.4
 $525.7
              
Basic earnings per share (Note 7):       
Basic earnings per share (Note 8):       
Income from continuing operations$0.66
 $1.02
 $1.65
 $3.53
$1.24
 $0.55
 $0.38
 $0.27
(Loss) income from discontinued operations(0.01) 0.05
 3.64
 0.43
Income from discontinued operations0.13
 0.11
 0.94
 5.02
Net income$0.66
 $1.07
 $5.28
 $3.97
$1.37
 $0.66
 $1.32
 $5.28
              
Basic weighted-average shares outstanding96.7
 107.6
 99.5
 109.1
83.2
 96.7
 84.2
 99.5
              
Diluted earnings per share (Note 7):       
Diluted earnings per share (Note 8):       
Income from continuing operations$0.66
 $1.01
 $1.64
 $3.50
$1.21
 $0.55
 $0.37
 $0.27
(Loss) income from discontinued operations(0.01) 0.05
 3.63
 0.43
Income from discontinued operations0.13
 0.11
 0.93
 5.00
Net income$0.66
 $1.06
 $5.27
 $3.93
$1.34
 $0.66
 $1.31
 $5.27
              
Diluted weighted-average shares outstanding97.0
 108.6
 99.8
 110.0
85.0
 97.0
 85.2
 99.8




See Notes to Condensed Consolidated Financial Statements.









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




Three Months Ended Nine Months EndedThree Months Ended Nine Months Ended
September 29,
2017
 September 30,
2016
 September 29,
2017
 September 30,
2016
September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Net income$63.7
 $115.0
 $525.7
 $432.6
$113.8
 $63.7
 $111.4
 $525.7
Other comprehensive income (loss), net of tax:              
Currency translation adjustments5.6
 1.9
 13.0
 9.5
3.2
 5.6
 (4.1) 13.0
Unrecognized gain on derivatives, net of $-, $0.2, $0.2 and $0.2 tax0.3
 
 0.9
 0.4
Unrecognized (loss) gain on benefit plans, net of $-, ($19.1), ($31.4) and ($14.0) tax(0.5) (21.8) 45.4
 (30.2)
Unrecognized (loss) gain on investments, net of $-, $-, $- and $- tax(10.5) 
 0.1
 
Derivatives, net of $-, $-, $- and $0.2 tax0.2
 0.3
 0.7
 0.9
Benefit plans, net of $-, $-, $- and ($31.4) tax(0.4) (0.5) (0.9) 45.4
Investments, net of $-, $-, $-, and $- tax
 (10.5) 
 0.1
Total other comprehensive income (loss), net of tax(5.1) (19.9) 59.4
 (20.3)3.0
 (5.1) (4.3) 59.4
Comprehensive Income$58.6
 $95.1
 $585.1
 $412.3
Comprehensive income$116.8
 $58.6
 $107.1
 $585.1


See Notes to Condensed Consolidated Financial Statements.







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


September 29,
2017
 December 30,
2016
September 28,
2018
 December 29,
2017
Assets      
Current Assets:      
Cash and cash equivalents$371.8
 $342.0
$290.7
 $1,260.9
Accounts receivable, less allowance for doubtful accounts of $4.0 and $4.0464.3
 431.0
Accounts receivable, less allowance for doubtful accounts of $3.4 and $2.8349.6
 275.4
Inventories341.3
 350.7
143.4
 128.7
Prepaid expenses and other current assets121.1
 131.9
117.7
 74.7
Notes receivable154.0
 

 154.0
Current assets held for sale
 310.9
1,136.8
 391.5
Total current assets1,452.5
 1,566.5
2,038.2
 2,285.2
Property, plant and equipment, net962.4
 881.5
439.3
 413.2
Goodwill3,459.5
 3,498.1
3,675.4
 3,482.7
Intangible assets, net8,545.9
 9,000.5
8,585.2
 8,261.0
Long-term assets held for sale
 742.7
Other assets191.6
 259.7
170.5
 156.2
Total Assets$14,611.9
 $15,206.3
$14,908.6
 $15,341.0
      
Liabilities and Shareholders' Equity      
Current Liabilities:      
Current maturities of long-term debt$318.2
 $271.2
$16.7
 $313.7
Accounts payable104.9
 112.1
76.6
 77.3
Accrued payroll and payroll-related costs84.4
 76.1
89.0
 78.4
Accrued interest78.1
 68.7
77.0
 57.0
Income taxes payable28.1
 101.7
43.4
 15.5
Accrued and other current liabilities440.4
 557.1
437.5
 368.5
Current liabilities held for sale
 120.3
182.4
 140.0
Total current liabilities1,054.1
 1,307.2
922.6
 1,050.4
Long-term debt5,517.4
 5,880.8
6,174.0
 6,420.9
Pension and postretirement benefits67.5
 136.4
65.2
 67.1
Environmental liabilities73.1
 73.0
49.8
 62.8
Deferred income taxes2,294.1
 2,398.1
668.9
 749.1
Other income tax liabilities78.5
 70.4
127.6
 94.1
Long-term liabilities held for sale
 22.6
Other liabilities414.2
 356.1
296.9
 352.0
Total Liabilities9,498.9
 10,222.0
8,305.0
 8,819.0
Shareholders' Equity:      
Preferred shares, $0.20 par value, 500,000,000 authorized; none issued and outstanding
 

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

 
Ordinary shares, $0.20 par value, 500,000,000 authorized; 118,666,830 and 118,182,944 issued;
95,662,446 and 104,667,545 outstanding

23.7
 23.6
Ordinary shares held in treasury at cost, 23,004,384 and 13,515,399(1,352.3) (919.8)
Ordinary shares, $0.20 par value, 500,000,000 authorized; 92,678,152 and 92,196,662 issued;
83,243,748 and 86,336,232 outstanding

18.5
 18.4
Ordinary shares held in treasury at cost, 9,434,404 and 5,860,430(1,618.5) (1,564.7)
Additional paid-in capital5,474.1
 5,424.0
5,521.3
 5,492.6
Retained earnings980.6
 529.0
2,701.0
 2,588.6
Accumulated other comprehensive loss(13.1) (72.5)(18.7) (12.9)
Total Shareholders' Equity5,113.0
 4,984.3
6,603.6
 6,522.0
Total Liabilities and Shareholders' Equity$14,611.9
 $15,206.3
$14,908.6
 $15,341.0


See Notes to Condensed Consolidated Financial Statements.







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


Nine Months EndedNine Months Ended
September 29,
2017
 September 30,
2016
September 28,
2018
 September 29,
2017
Cash Flows From Operating Activities:      
Net income$525.7
 $432.6
$111.4
 $525.7
Adjustments to reconcile net cash from operating activities:      
Depreciation and amortization606.5
 628.5
597.0
 606.5
Share-based compensation46.1
 34.4
27.9
 46.1
Deferred income taxes(128.7) (324.0)(232.7) (128.7)
Non-cash impairment charges
 16.9
Gain on divestitures(418.1) 1.7
Loss (gain) on divestiture0.6
 (418.1)
Other non-cash items40.8
 54.7
(3.7) 40.8
Changes in assets and liabilities, net of the effects of acquisitions:      
Accounts receivable, net(34.7) (37.2)(59.0) (34.7)
Inventories(18.2) (2.8)43.1
 (18.2)
Accounts payable(30.2) 3.3
(0.1) (30.2)
Income taxes(68.1) 11.6
16.7
 (68.1)
Other(72.6) 53.5
(20.1) (72.6)
Net cash from operating activities448.5
 873.2
481.1
 448.5
Cash Flows From Investing Activities:      
Capital expenditures(151.3) (133.9)(93.3) (151.3)
Acquisitions and intangibles, net of cash acquired(35.9) (245.4)
Acquisitions, net of cash(699.9) (35.9)
Proceeds from divestitures, net of cash576.9
 3.0
313.2
 576.9
Other0.5
 5.3
28.8
 0.5
Net cash from investing activities390.2
 (371.0)(451.2) 390.2
Cash Flows From Financing Activities:      
Issuance of external debt540.0
 36.3
657.2
 540.0
Repayment of external debt and capital leases(887.5) (439.0)
Repayment of external debt and capital lease obligation(1,563.4) (887.5)
Debt financing costs(12.7) 
(12.0) (12.7)
Proceeds from exercise of share options4.0
 10.4
1.0
 4.0
Repurchase of shares(437.7) (377.5)(57.4) (437.7)
Other(18.6) (23.0)(24.3) (18.6)
Net cash from financing activities(812.5) (792.8)(998.9) (812.5)
Effect of currency rate changes on cash2.7
 1.8
(0.9) 2.7
Net change in cash, cash equivalents and restricted cash28.9
 (288.8)(969.9) 28.9
Cash, cash equivalents and restricted cash at beginning of period361.1
 588.4
1,279.1
 361.1
Cash, cash equivalents and restricted cash at end of period$390.0
 $299.6
$309.2
 $390.0
      
Cash and cash equivalents at end of period$371.8
 $280.5
$290.7
 $371.8
Restricted cash included in prepaid expenses and other current assets at end of period
 0.1
Restricted cash included in other assets at end of period18.2
 19.0
18.5
 18.2
Cash, cash equivalents and restricted cash at end of period$390.0
 $299.6
$309.2
 $390.0


See Notes to Condensed Consolidated Financial Statements.









MALLINCKRODT PLC
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited, in millions)
 
Ordinary Shares Treasury Shares 
Additional
Paid-In Capital
 Retained Earnings Accumulated Other Comprehensive Loss 
Total
Shareholders'
Equity
Ordinary Shares Treasury Shares 
Additional
Paid-In Capital
 Retained Earnings Accumulated Other Comprehensive Loss 
Total
Shareholders'
Equity
Number 
Par
 Value
 Number Amount Number 
Par
 Value
 Number Amount 
Balance at December 30, 2016118.2
 $23.6
 13.5
 $(919.8) $5,424.0
 $529.0
 $(72.5) $4,984.3
Impact of accounting standard adoptions
 
 
 
 
 (72.1) 
 (72.1)
Balance at December 29, 201792.2
 $18.4
 5.9
 $(1,564.7) $5,492.6
 $2,588.6
 $(12.9) $6,522.0
Impact of accounting standard adoptions, net of tax
 
 
 
 
 2.6
 (1.5) 1.1
Net income
 
 
 
 
 525.7
 
 525.7

 
 
 
 
 111.4
 
 111.4
Currency translation adjustments
 
 
 
 
 
 13.0
 13.0

 
 
 
 
 
 (4.1) (4.1)
Change in derivatives, net of tax
 
 
 
 
 
 0.9
 0.9

 
 
 
 
 
 0.7
 0.7
Unrecognized gain on benefit plans
 
 
 
 
 
 45.4
 45.4
Unrecognized gain on investments
 
 
 
 
 
 0.1
 0.1
Share options exercised0.1
 
 
 
 4.0
 
 
 4.0
Change in benefit plans, net of tax
 
 
 
 
 
 (0.9) (0.9)
Vesting of restricted shares0.4
 0.1
 
 (4.7) 
 
 
 (4.6)0.5
 0.1
 0.1
 (2.2) 0.8
 
 
 (1.3)
Share-based compensation
 
 
 
 46.1
 
 
 46.1

 
 
 
 27.9
 
 
 27.9
Reissuance of treasury shares
 
 
 5.2
 
 (2.0) 
 3.2

 
 (0.2) 3.6
 
 (1.6) 
 2.0
Repurchase of shares
 
 9.5
 (433.0) 
 
 
 (433.0)
 
 3.6
 (55.2) 
 
 
 (55.2)
Balance at September 29, 2017118.7
 $23.7
 23.0
 $(1,352.3) $5,474.1
 $980.6
 $(13.1) $5,113.0
Balance at September 28, 201892.7
 $18.5
 9.4
 $(1,618.5) $5,521.3
 $2,701.0
 $(18.7) $6,603.6
 
See Notes to Condensed Consolidated Financial Statements.







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


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


Basis of Presentation
The unaudited condensed consolidated financial statements have been prepared in U.S. Dollarsdollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP").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 net salesrevenues and expenses. Actual results may differ from those estimates. The unaudited condensed consolidated financial statements include the accounts of Mallinckrodt plc,the Company, its wholly-owned subsidiaries and entities in which they own or control more than fifty percent50% of the voting shares, or have the ability to control through similar rights. All intercompany balances and transactions have been eliminated in consolidation and all normal recurring adjustments necessary for a fair presentation have been included in the results reported. The results of entities disposed of are included in the unaudited condensed consolidated financial statements up to the date of disposal, and where appropriate, these operations have been reflected asreported in discontinued operations. Divestitures of product lines and businesses that did not qualify asmeeting the criteria for 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 December 30, 2016fiscal year end balance sheet data was derived from the unaudited condensedaudited consolidated financial statements, but doesdo 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 for the period ended September 30, 2016,December 29, 2017 filed with the U.S. Securities and Exchange Commission ("SEC") on November 29, 2016.February 27, 2018.
The Company completed the sale of its Nuclear Imaging business on January 27, 2017. As a result, prior year balances have been recast to present the financial results of this business as a discontinued operation.


Fiscal Year
The Company historically reportedreports its results based on a "52-53 week" year ending on the last Friday of September. On May 17, 2016,December. Unless otherwise indicated, the Board of Directors of the Company approved a change in the Company’s fiscal year endthree and nine months ended September 28, 2018 refers to the last Friday in December from the last Friday in September. The change in fiscal year became effective for the Company’s 2017 fiscal year, which began on December 31, 2016thirteen and will end on December 29, 2017. As a result of the change in fiscal year end, the Company filed a Transition Report on Form 10-Q on February 7, 2017 covering the period from October 1, 2016 through December 30, 2016. Unless otherwise indicated,thirty-nine week periods ended September 28, 2018 and the three and nine months ended September 29, 2017 refers to the thirteen and thirty-nine week periodperiods ended September 29, 2017 and the three and nine months ended September 30, 2016 refers to the fourteen and forty week period ended September 30, 2016.2017.







2.Recently Issued Accounting Standards
Adopted
The Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") 2017-04, "Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment," in January 2017. This update eliminates step 2 from the goodwill impairment test, and requires the goodwill impairment test2018-05, "Income Taxes (Topic 740): Amendments to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocatedSEC Paragraphs Pursuant to that reporting unit. The Company early adopted this standard in fiscal 2017, which did not have a material impact to the unaudited condensed consolidated financial statements. The Company will apply this standard to prospective goodwill impairment tests.
The FASB issued ASU 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory," in October 2016. This update simplifies the practice of how income tax consequences of an intra-entity transfer of an asset other than inventory should be recognized. Upon adoption, the entity must recognize such income tax consequences when the intra-entity transfer occurs rather than waiting until such time as the asset has been sold to an outside party. The Company early adopted this standard in fiscal 2017, which resulted in a $75.0 million decrease to beginning retained earnings with an offsetting decrease of $67.2 million to other assets and a $7.8 million decrease to prepaid expenses on its unaudited condensed consolidated balance sheet. The prior periods were not restated.
The FASB issued ASU 2016-15, "Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments," in August 2016 and ASU 2016-18 "Statement of Cash Flows (Topic 230): Restricted Cash," in November 2016. These updates provide guidance for nine targeted clarifications with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The Company early adopted these standards in fiscal 2017 and revised the prior year statement of cash flows. The adoption of ASU 2016-18, regarding presentation of restricted cash, increased the net cash used in investing activities during the nine months ended September 30, 2016 by $47.4 million. The adoption of ASU 2016-15, regarding the other targeted clarifications, did not result in any material changes to the unaudited condensed consolidated financial statements.
The FASB issued ASU 2016-09, "Stock Compensation,SEC Staff Accounting Bulletin No. 118 (SEC Update)," in March 2016.2018. This update simplifies several aspectsadds SEC paragraphs pursuant to the SEC's Staff Accounting Bulletin ("SAB") 118, which provides guidance on accounting for the tax effects of the Tax Cuts and Jobs Act ("TCJA") that was enacted in December 2017. SAB 118 provides a measurement period that should not extend beyond one year from the TCJA enactment date for companies to complete their accounting for share-based payment award transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification of certain tax effects withinof the statement of cash flows.TCJA. The amendments are effective upon addition to the FASB Accounting Standards Codification ("ASC"). The Company adopted this guidance in fiscal 2017, which resulted in a $2.9 million increase to beginning retained earnings to recognize net operating loss carryforwards, net of a valuation allowance, attributable to excess tax benefits on stock compensation that had not been previously recognized in2018. See Note 7 for additional paid-in capital.
The FASB issued ASU 2015-16, "Simplifying the Accounting for Measurement-Period Adjustments," in September 2015. This update requires an acquirer to recognize adjustments to the provisional amounts that are identified during the measurement period in the reporting period in which the adjusting amounts are determined. The amendments in this update require an entity to present separately on the facedetails of the income statement or disclose in the notes the portionCompany's assessment of the amount recorded in current period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The Company adopted this standard in fiscal 2017, which did not have any impact on historical acquisitions.
The FASB issued ASU 2015-11, "Simplifying the Measurement of Inventory," in July 2015. The issuance of this update is part of the FASB's initiative to more closely align the measurement of inventory between GAAP and International Financial Reporting Standards ("IFRS"). Under the new guidance, inventory must be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The Company adopted this standard in fiscal 2017, which did not have a material impact to the unaudited condensed consolidated financial statements.

Not Yet Adopted
The FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities" in August 2017. This update simplifies the application of hedge accounting and enhances the economics of the entity’s risk management activities in its financial statements. The update amends the guidance on designation and measurement for qualifying hedging relationships requiring the application of a modified retrospective approach on the date of adoption. This guidance is effective for the Company in the first quarter of fiscal 2019. The Company is assessing the timing of adoption and the impact of this guidance on the unaudited condensed consolidated financial statements.adoption.
The FASB issued ASU 2017-09, "Compensation - Stock Compensation: Scope of Modification Accounting," in May 2017. Under the new guidance, the effects of a modification should be accounted for unless all of the following are met: (1) the fair value or calculated intrinsic value of the modified award is the same as the fair value of the original award immediately before the original award is modified; (2) the vesting conditions of the modified award are the same as the vesting conditions of the original award


immediately before the original award is modified; and (3) the classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the original award is modified. This guidance is effective for the Company in the first quarter of fiscal 2018. The Company expects the impactadopted this standard in fiscal 2018 and will apply this standard to prospective modifications. The adoption of this guidance to be immaterialdid not result in any material changes to the unaudited condensed consolidated financial statements upon adoption.statements.
The FASB issued ASU 2017-07, "Compensation - Retirement Benefits: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post Retirement Benefit Cost," in March 2017. This update requires that the service cost component be disaggregated from the other components of net benefit cost. Service cost should be reported in the same line item or items as other compensation costs arising from services rendered by pertinent employees during the period. The other components of net benefit cost should be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. ThisThe Company adopted this guidance is effectivein fiscal 2018 which required retroactive application resulting in the reclassification of $72.4 million of other components of net benefit costs to other income (expense), net for the Company in the first quarternine months ended September 29, 2017 from selling, general and administrative expenses ("SG&A") of fiscal 2018.$70.8 million, cost of sales of $1.2 million, and research and development expenses ("R&D") of $0.4 million. The Company expects the impactadoption of this guidance to be immaterialdid not result in any material changes to the unaudited condensed consolidated financial statements upon adoption.statements.
The FASB issued ASU 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business," in January 2017. This update provides a screen to determine whether or not a set of assets is a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set of assets is not a business. If the screen is not met, the amendments in this update (1) require that (1) to be considered a business, a set of assets must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. This guidance is effective for theThe Company in the first quarter of fiscal 2018. Depending upon the individual facts and circumstances of future transactions,adopted this guidance mayin fiscal 2018, which did not have a material impact to the unaudited condensed consolidated financial statements.
The FASB issued ASU 2016-01, "Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," in January 2016. This update addresses certain aspects of recognition, measurement, presentation and disclosure of financial instruments. Under the new guidance, equity investments, other than equity method investments, are to be measured at fair value with changes in fair value recognized through net income. The Company adopted this guidance in fiscal 2018, resulting in a $1.5 million increase to beginning retained earnings with an offsetting decrease to accumulated other comprehensive loss relating to the unrealized gain on its investment in Mesoblast Limited ("Mesoblast"). The adoption of this standard did not result in more transactions being accounted for as asset acquisitions rather than business combinations.any material changes to the unaudited condensed consolidated financial statements.

The FASB issued ASU 2014-09, "Revenue from Contracts with Customers," in May 2014. The issuance of ASU 2014-09 and IFRSInternational Financial Reporting Standards ("IFRS") 15, "Revenue from Contracts with Customers," completes the joint effort by the FASB and the International Accounting Standards Board to clarify the principles for recognizing revenue and to develop a common revenue standard for GAAP and IFRS. Under the new guidance, an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, applying the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract(s); (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract(s); and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The guidance is effective for the Company in the first quarter of fiscal year 2018. The FASB subsequently issued additional ASUs to clarify the guidance in ASU 2014-09. The additional ASUs issued include ASU 2016-08, "Revenue from Contracts with Customers;" ASU 2016-10 "Revenue from Contracts with Customers, Identifying Performance Obligations and Licensing;" and ASU 2016-12, "Narrow-Scope Improvements and Practical Expedients."




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

Not Yet Adopted
The FASB issued ASU 2018-15, "Intangibles - Goodwill and has preliminarily assessed certain other customer arrangements basedOther - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract," in August 2018. This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The amendments in this update also require the entity (customer) to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. Upon adoption, the update will be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. This guidance is effective for the Company in the first quarter of fiscal 2020; however, early adoption is permitted. The Company is currently assessing the impact of this guidance on the natureunaudited condensed consolidated financial statements.
The FASB issued ASU 2016-02, "Leases," in February 2016. This update was issued to increase transparency and comparability among organizations by recognizing all lease transactions (with terms in excess of its business;12 months) on the balance sheet as a lease liability and at this time,a right-of-use asset (as defined under ASU 2016-02). This guidance is effective for the Company does not anticipate a significant impact upon adoption. However,in the assessment is ongoingfirst quarter of fiscal 2019. The FASB subsequently issued additional ASUs to clarify the guidance in ASU 2016-02. The ASUs include ASU 2018-10, "Codification Improvements to Topic 842, Leases" and a more detailed analysis of contracts subject to the preliminary assessment or review of additional contracts may identify a more significant impact.ASU 2018-11 "Leases, (Topic 842), Targeted Improvements." The Company currently expects in part dueto utilize the additional transition approach as provided under ASU 2018-11, which allows for the initial application of the new leasing standard at the adoption date (day 1 of fiscal 2019) with a cumulative-effect adjustment to the limited anticipatedopening balance of retained earnings. The Company has identified its population of lease agreements and is currently assessing other arrangements such as supply and service agreements for embedded leases. Although the Company is in the process of determining the potential impact on its consolidated financial statements, it anticipates that itthe most significant change will utilize the modified retrospective transition approach of adopting the ASU.
The Company's status of various ASUs are further described within the notesbe related to the financial statements included withinCompany recording additional assets and corresponding liabilities on the balance sheet for operating leases. The ultimate impact of the new standard will depend on the total amount of the Company's Annual Report filed on Form 10-K forlease commitments as of the fiscal year ended September 30, 2016.adoption date.


3.Revenue from Contracts with Customers
Product Sales Revenue

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




The following table reflects activity in the Company's sales reserve accounts, on a continuing operations basis:
 Rebates and Chargebacks Product Returns Other Sales Deductions Total
Balance at December 29, 2017$60.3
 $4.1
 $1.1
 $65.5
Provisions221.2
 6.6
 7.4
 235.2
Payments or credits(205.8) (5.9) (7.4) (219.1)
Balance at September 28, 2018$75.7
 $4.8
 $1.1
 $81.6


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

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

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

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

Product sales transferred to customers at a point in time and over time are as follows:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 28,
2018
Product sales transferred at a point in time78.9% 77.9%
Product sales transferred over time21.1% 22.1%


Transaction price allocated to the remaining performance obligations

The majority of the Company's contracts (as defined under ASC 606) are less than one year; therefore, the related disclosure of the amount of transaction price allocated to the performance obligations that are unsatisfied at period end has been omitted, with the exception of those noted below. The following table includes estimated revenue from certain of the Company's products that are expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at September 28, 2018:
Remainder of Fiscal 2018$71.7
Fiscal 2019135.3
Fiscal 2020118.6
Fiscal 202123.9
Thereafter3.2


Costs to obtain a contract

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




Costs to fulfill a contract

The Company capitalizes the costs associated with the devices used in the Company's portfolio of drug-device combination products, which are used in satisfaction of future performance obligations. Capital expenditures for these devices represent cash outflows for the Company's cost to produce the asset, which is classified in property, plant and equipment, net on the unaudited condensed consolidated balance sheet and expensed to cost of sales over the useful life of the equipment. As of September 28, 2018, the total net book value of these devices was $27.6 million. The associated depreciation expense recognized during the nine months ended September 28, 2018 was $8.5 million.

Product Royalty Revenues
In relation to the Company's acquisition of Sucampo Pharmaceuticals, Inc. on February 13, 2018, as discussed in further detail in Note 5, it acquired an arrangement under which the Company licenses certain rights to Amitiza® (lubiprostone) ("Amitiza") to a third party in exchange for royalties on net sales of the product. The Company recognizes such royalty revenue as the related sales occur. The associated royalty revenue recognized during the three and nine months ended September 28, 2018 was $22.5 million and $52.1 million, respectively.

Contract Balances

Accounts receivable are recorded when the right to consideration becomes unconditional. Payments received from customers are typically based upon payment terms of 30 days. The Company does not maintain contract asset balances aside from the accounts receivable balance presented on the unaudited condensed consolidated balance sheet as costs to obtain a contract are expensed when incurred and the amortization period would have been less than one year. These costs are recorded within SG&A expenses.
Contract liabilities are recorded when cash payments are received in advance of the Company's performance, including amounts which are refundable. Contract liabilities as of September 28, 2018 and December 29, 2017 were as follows:
 September 28,
2018
 December 29,
2017
Accrued and other current liabilities$21.2
 $13.9
Other liabilities14.0
 6.3
Contract liabilities$35.2
 $20.2

Revenue recognized during the nine months ended September 28, 2018 from amounts included in contract liabilities at the beginning of the period was approximately $14.9 million.

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



The following table summarizes the financial results of the Specialty Generics Disposal Group presented in the unaudited condensed consolidated statements of income:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Major line items constituting income from discontinued operations:       
Net sales$159.9
 $193.3
 $536.4
 $668.6
Cost of sales107.3
 125.3
 336.1
 384.5
Selling, general and administrative expenses29.4
 19.3
 73.8
 56.6
Research and development expenses7.6
 12.6
 36.8
 46.3
Restructuring charges, net0.1
 (1.1) 5.3
 5.8
Non-restructuring impairment charges2.0
 
 2.0
 
Other income, net
 0.6
 0.3
 4.4
Income from discontinued operations13.5
 37.8
 82.7
 179.8
Income tax expense2.3
 26.6
 18.1
 42.6
Income from discontinued operations, net of income taxes$11.2
 $11.2
 $64.6
 $137.2


The following table summarizes the assets and liabilities of the Specialty Generics Disposal Group that are classified as held for sale on the unaudited condensed consolidated balance sheets:
 September 28,
2018
 December 29, 2017
Carrying amounts of major classes of assets included as part of discontinued operations:   
Accounts receivable$189.0
 $170.4
Inventories205.9
 211.7
Property, plant and equipment, net561.7
 553.6
Intangible assets, net110.3
 114.0
Other current and non-current assets69.9
 84.5
Total assets classified as held for sale in the balance sheet$1,136.8
 $1,134.2
    
Carrying amounts of major classes of liabilities included as part of discontinued operations:   
Accounts payable$39.0
 $36.0
Other current and non-current liabilities143.4
 126.6
Total liabilities classified as held for sale in the balance sheet$182.4
 $162.6


The following table summarizes significant cash and non-cash transactions of the Specialty Generics Disposal Group that are included within the unaudited condensed consolidated statements of cash flows for the respective periods:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Depreciation, including accelerated depreciation$0.6
 $15.3
 $12.1
 $45.7
Amortization
 3.9
 1.7
 14.6
Capital expenditures5.9
 11.1
 21.7
 41.7

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

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



of the Nuclear Imaging business of $362.8 million during the nine months ended September 29, 2017, which excluded any potential proceeds from the contingent consideration and reflects a charge of $0.6 million during the three months ended September 29, 2017 primarily as a result of the finalongoing working capital adjustmentadjustments associated with the purchase agreement.


During the nine months ended September 28, 2018 the Company received a total of $15.0 million in contingent consideration related to the sale of the Nuclear Imaging business, consisting of a $6.0 million cash payment and the issuance of $9.0 million par value non-voting preferred equity certificates. The preferred equity certificates accrue interest at a rate of 10.0% per annum and are redeemable on the retirement date of July 27, 2025, or earlier if elected by the issuer, for cash at a price equal to the par value and any accrued but unpaid interest. The Company recorded tax expense of $1.5 million associated with the $6.0 million contingent consideration cash payment. The $9.0 million in preferred equity certificates is presented as a non-cash investing activity on the unaudited condensed consolidated statement of cash flows. The $13.5 million of contingent consideration received, net of tax, was recorded as income from discontinued operations.
The following table summarizes the financial results of the Nuclear Imaging business presented in the unaudited condensed consolidated statements of income:
 Three Months Ended Nine Months Ended
 September 29,
2017
 September 29,
2017
Major line items constituting income from discontinued operations:   
Net sales$
 $31.6
Cost of sales
 15.6
Selling, general and administrative expenses
 7.8
Other
 (0.2)
Income from discontinued operations
 8.4
(Loss) gain on divestiture of discontinued operations(0.6) 362.8
(Loss) income from discontinued operations, before income taxes(0.6) 371.2
Income tax (benefit) expense(0.1) 5.2
(Loss) income from discontinued operations, net of income taxes$(0.5) $366.0
 Three Months Ended Nine Months Ended
Major line items constituting income from discontinued operationsSeptember 29, 2017 September 30, 2016 September 29, 2017 September 30, 2016
Net sales$
 $108.8
 $31.6
 $315.0
Cost of sales
 54.6
 15.6
 153.8
Selling, general and administrative expenses
 19.1
 7.8
 64.5
Restructuring charges, net
 (0.3) 
 0.1
Other
 2.2
 (0.2) 3.6
Income from discontinued operations
 33.2
 8.4
 93.0
(Loss) gain on divestiture of discontinued operations(0.6) 
 362.8
 
(Loss) income from discontinued operations, before income taxes(0.6) 33.2
 371.2
 93.0
Income tax (benefit) expense(0.1) 24.8
 5.2
 43.8
(Loss) income from discontinued operations, net of income taxes$(0.5) $8.4
 $366.0
 $49.2


During the three months ended September 29, 2017, there was an income tax benefit of $0.1 million associated with the $0.6 million loss recognized on divestiture. During the nine months ended September 29, 2017, there was income tax expense of $0.9 million associated with the $362.8 million gain on divestiture and a $4.3 million income tax expense associated with the $8.4 million income from discontinued operations. The tax impact of the gain recognized on divestiture was favorably impacted by a benefit from permanently deductible items.

The following table summarizes the assets and liabilitiesCompany incurred $0.3 million of the Nuclear Imaging business that are classified as held for sale on the unaudited condensed consolidated balance sheets:
 September 29, 2017 December 30, 2016
Carrying amounts of major classes of assets included as part of discontinued operations   
Accounts receivable$
 $49.6
Inventories
 20.0
Property, plant and equipment, net
 188.7
Other current and non-current assets
 52.6
Total assets classified as held for sale in the balance sheet$
 $310.9
    
Carrying amounts of major classes of liabilities included as part of discontinued operations   
Accounts payable$
 $19.7
Other current and non-current liabilities
 100.6
Total liabilities classified as held for sale in the balance sheet$
 $120.3

The following table summarizes significant cash and non-cash transactions ofcapital expenditures related to the Nuclear Imaging business that are included within the unaudited condensed consolidated statements of cash flows for the respective periods:
 Three Months Ended Nine Months Ended
 September 29, 2017 September 30, 2016 September 29, 2017 September 30, 2016
Depreciation$
 $4.5
 $
 $14.3
Capital expenditures
 4.0
 0.3
 7.8
nine months ended September 29, 2017.
All other notes to the unaudited condensed consolidated financial statements that were impacted by this discontinued operation have been reclassified accordingly.



Divestitures

CMDS: PreveLeak/Recothrom: On November 27, 2015,March 16, 2018, the Company completed the sale of a portion of its contrast mediaHemostasis business, inclusive of its PreveLeak™ Surgical Sealant ("PreveLeak") and delivery systemsRECOTHROM® Thrombin topical (Recombinant) ("CMDS"Recothrom") businessproducts to Guerbet S.A.Baxter International, Inc. ("Guerbet"Baxter") for cash considerationapproximately $185.0 million, with a base payment of approximately $270.0$153.0 million, inclusive of existing inventory and subject to net working capital adjustments. Duringa closing inventory adjustment, with the three months ended September 30, 2016, the Company had no net sales and a loss on the sale of business of $4.0 million,remainder in potential future milestones. Baxter assumed other expenses, including contingent liabilities associated with $0.4 million related income tax effect.PreveLeak. During the nine months ended September 30, 2016,28, 2018, the Company had $1.8recorded a pre-tax loss on the sale of $0.6 million, which excluded any potential proceeds from the attainment of net sales,future milestones and reflected a $0.2post-sale closing inventory adjustment of $13.7 million. The financial results of the PreveLeak and Recothrom operations are presented within continuing operations as this divestiture did not meet the criteria for discontinued operations presentation.
As part of the divestiture and calculation of the gain, the Company wrote off intangible assets of $49.9 million income tax effect and $4.4goodwill of $51.5 million, loss, net of tax. All activity relatedfrom the Specialty Brands segment, ascribed to the CMDS business has been reportedPreveLeak and Recothrom operations. The remaining items included in discontinued operations.the loss calculation are primarily attributable to inventory transferred, contingent consideration transferred and transaction costs incurred by the Company.


Divestitures



Intrathecal Therapy: On January 30,March 17, 2017, the Company announced that it had entered into a definitive agreement to sellcompleted the sale of its Intrathecal Therapy business to Piramal Enterprises Limited's subsidiary in the United Kingdom ("U.K."), Piramal Critical Care ("Piramal"), for approximately $203.0 million, including fixed consideration of $171.0 million and contingent consideration of up to $32.0 million. The $171.0 million of fixed consideration consisted of $17.0 million received at closing and a $154.0 million note receivable that iswas due one year from the transaction closing date. The transaction was completed on March 17, 2017. TheDuring the nine months ended September 29, 2017, the Company recorded a pre-tax gain on the sale of the business of $56.6 million, during the nine months ended September 29, 2017, which excluded any potential proceeds from the contingent consideration and reflects a post-sale working capital adjustment of $0.4 million during the three months ended September 29, 2017. On February 28, 2018, the Company received $154.0 million from Piramal for the settlement of the aforementioned note receivable. The financial results of the Intrathecal Therapy business are presented within continuing operations as this divestiture did not meet the criteria for discontinued operations classification.presentation.
As part of the divestiture and calculation of the gain, the Company wrote off intangible assets of $48.7 million and goodwill of $49.8 million, from the Specialty Brands segment, ascribed to the Intrathecal Therapy business. The Company is committed to reimburse up to $7.3 million of product development expenses incurred by Piramal.Piramal, of which $3.1 million was included in accrued and other current liabilities on the unaudited condensed consolidated balance sheet as of September 28, 2018. The remaining items included in the gain calculation are attributable to inventory transferred and transaction costs incurred by the Company.


4.5.Acquisitions License Agreements and Other Investments
During the three months ended September 29, 2017 and September 30, 2016, the Company recognized $2.7 million and $3.4 million, respectively, of expense primarily associated with fair value adjustments of acquired inventory. During the nine months ended September 29, 2017 and September 30, 2016, the Company recognized $8.6 million and $8.1 million, respectively, of expense primarily associated with fair value adjustments of acquired inventory. The amount of acquisition-related costs included within operating income for the three and nine months ended September 29, 2017 were $1.2 million and $2.3 million, respectively. The amount of acquisition-related costs included within operating income for the three and nine months ended September 30, 2016 was $3.8 million and $5.8 million, respectively.
The Company's acquisitions and license agreements are described further within the notes to the financial statements included within the Company's Annual Report filed on Form 10-K for the fiscal year ended September 30, 2016.Sucampo Pharmaceuticals, Inc.

InfaCare
On September 25, 2017,February 13, 2018, the Company acquired InfaCare Pharmaceutical CorporationSucampo Pharmaceuticals, Inc. ("InfaCare"Sucampo") in a transaction valued at approximately $80.4 million, with additional paymentsthrough the acquisition of up to $345.0 million dependent on regulatory and sales milestones ("all the InfaCare Acquisition").outstanding common stock of Sucampo. Consideration for the transaction consisted of approximately $37.2 million in cash paid to the prior shareholders of InfaCare and$1.2 billion, including the assumption of approximately $43.2Sucampo's third-party debt ("the Sucampo Acquisition"). The acquisition was funded through the issuance of $600.0 million aggregate principal amount of debtsenior secured notes, a $900.0 million borrowing under the Company's revolving credit facility, as discussed further in Note 12, and other liabilities,cash on hand. Sucampo's commercialized products include Amitiza, a leading global product in the branded constipation market, and Rescula® (unoprostone isopropyl ophthalmic solution) 0.15% ("Rescula"), which is indicated for ocular hypertension and open-angle glaucoma, and marketed solely in Japan. Through this acquisition, the Company acquired VTS-270, a Phase 3 development product for Niemann-Pick Type C, a rare, neurodegenerative and ultimately fatal disease that can present at any age. Also acquired was repaidan option to exercise a collaborative agreement with Cancer Prevention Pharmaceuticals ("CPP") associated with the development of CPP-1X/sulindac, a Phase 3 development product for Familial Adenomatous Polyposis ("FAP").
Upon completion of the Sucampo Acquisition, Sucampo's 3.25% convertible senior notes due 2021 ("the Sucampo Notes") became eligible to receive increased consideration in conjunction with a make-whole fundamental change, such that each $1,000 principal face amount of Sucampo Notes could be converted into $1,221 in cash. As of September 28, 2018, the InfaCare Acquisition. InfaCare is focused on developmentissued convertible debt of $300.0 million had been converted and commercialization of proprietary pharmaceuticals for neonatal and pediatric patient populations. InfaCare's developmental product stannsoporfin, a heme oxygenase inhibitor, is under investigation for its potential to reducepaid in full by the production of bilirubin, the elevation of which can contribute to serious consequences in infants. The fair value of the contingent consideration associated with the transaction was $35.0 million at September 25, 2017. The InfaCare Acquisition was funded with cash on hand.Company.

Stratatech
On August 31, 2016, the Company acquired Stratatech Corporation ("Stratatech") - which includes StrataGraft®, a regenerative skin tissue and a technology platform for genetically enhanced skin tissues - for upfront considerations of $76.0 million, and contingent milestone payments, which are primarily regulatory, and royalty obligations that could result in up to $121.0 million of additional consideration ("the Stratatech Acquisition"). Stratatech is a regenerative medicine company focused on the development of unique, proprietary skin substitute products. Developmental products include StrataGraft® regenerative skin tissue ("StrataGraft") and a technology platform for genetically enhanced skin tissues. The Stratatech Acquisition was funded with cash on hand.




Hemostasis Products
On February 1, 2016, the Company acquired three commercial stage topical hemostasis drugs from The Medicines Company ("the Hemostasis Acquisition") - RECOTHROM® Thrombin topical (Recombinant) ("Recothrom"), PreveLeakTM Surgical Sealant ("PreveLeak"), and RAPLIXATM (Fibrin Sealant (Human)) ("Raplixa") - for upfront consideration of $173.5 million, inclusive of existing inventory, and contingent sales-based milestone payments that could result in up to $395.0 million of additional consideration. The fair value of the contingent consideration and acquired contingent liabilities associated with the transaction were $52.0 million and $10.6 million, respectively, at February 1, 2016. The Hemostasis Acquisition was funded with cash on hand.


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


 InfaCare
Cash and cash equivalents$1.3
Intangible assets113.5
Goodwill13.3
Other assets, current and non-current0.1
Total assets acquired128.2
Current liabilities14.7
Deferred tax liabilities, net (non-current)11.3
Contingent consideration35.0
Total debt30.0
Total liabilities assumed91.0
Net assets acquired$37.2


Cash and cash equivalents$149.6
Accounts receivable35.7
Inventory153.2
Intangible assets919.5
Goodwill244.7
Other current and non-current assets25.9
Total assets acquired1,528.6
Current liabilities108.3
Deferred tax liabilities, net (non-current)170.2
Debt366.3
Other noncurrent liabilities36.2
Total liabilities assumed681.0
Net assets acquired$847.6


The following is a reconciliation of the total consideration to net assets acquired:
Total consideration, net of cash$698.0
Plus: cash assumed in acquisition149.6
Total consideration/net assets acquired$847.6

 InfaCare
Total consideration, net of cash$70.9
Plus: cash assumed in acquisition1.3
Total consideration72.2
Less: contingent consideration(35.0)
Net assets acquired$37.2


Intangible assets acquired consist of the following:
  Amount Amortization Period Discount Rate
Completed technology - Amitiza $634.0
 9 years 14.0%
Completed technology - Rescula 11.0
 8 years 14.0%
In-process research and development - VTS-270 274.5
 Non-Amortizable 15.0%

InfaCareAmount Amortization Period
In-process research and development ("IPR&D") - stannsoporfin$113.5
 Non-Amortizable
The IPR&D intangible assets relates to stannsoporfin. The fair value of the completed technology and in-process research and development ("IPR&D&D") was determined using the income approach, which is a valuation technique that provides an estimate of fair value of the assets based on the market participant expectations of cash flows the asset would generate. The cash flows were discounted at a ratecommensurate with the level of 13.5%.risk associated with each asset or its projected cash flows. The IPR&D discount rate for stannsoporfin wasrates were developed after assigning a probability of success to achieving the projected cash flows based on the current stage of development, inherent uncertainty in the FDAU.S. Food and Drug Administration ("FDA") approval process and risks associated with commercialization of a new product. Based on the Company's preliminary estimate, the excess of purchase price over net tangible and intangible assets acquired resulted in goodwill, which represents future product development, the assembled workforce, and the tax status of the transaction. The goodwill is not deductible for U.S. income tax purposes. All assets acquired are included within the Company's Specialty Brands segment.



Financial results - The amount of net sales and loss included in the Company's results for the periods presented were as follows:

 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Net sales$50.7
 $
 $124.5
 $
Operating loss(32.2) 
 (99.9) 



The following was included within cost of sales for the periods presented:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Intangible asset amortization$18.0
 $
 $45.0
 $
Inventory fair value step-up expense31.0
 
 77.5
 


Acquisition-related costs incurred for the acquisition of $3.2 million were recognized during the nine months ended September 28, 2018.




Licenses
On April 5, 2018 (the "Exercise Date"), the Company exercised the option under its collaborative agreement with CPP to negotiate terms of an exclusive license to develop and Other Investments
commercialize CPP-1X/sulindac in North America. In January 2017, $21.5addition, the Company provided CPP with a $10.0 million of consideration was remitted to Mesoblast Limited ("Mesoblast") in exchangeupfront R&D payment for equity shares and rights to a nine month exclusivity periodexpenses related to any potential commercial and development agreementsthe FAP pivotal trial incurred during the "Negotiation Period," or the period from the Exercise Date through the execution of such license agreement. CPP shall return to the Company may enter into for Mesoblast's therapy products used to treat acute graft versus host disease and/or chronic low back pain. As a resultany portion of this transaction the CompanyR&D payment that is not utilized during the Negotiation Period. Of the $10.0 million upfront payment, $7.3 million was utilized during the nine months ended September 28, 2018 and recorded an available for sale investmentas R&D expense within the condensed consolidated statement of $19.7income. The remaining $2.7 million was included withinin prepaid expenses and other current assets and an intangible asset of $1.8 million inon the unaudited condensed consolidated balance sheet. This intangible asset was fully amortizedsheet as of September 29, 2017 as28, 2018.
On August 4, 2018, the nine month exclusivity period had ended.license agreement with CPP was executed and the Company paid $5.0 million upfront with cash on hand and gained exclusive rights to develop and commercialize the product in North America, if approved. The agreement includes additional payments of up to $185.0 million dependent on developmental, regulatory and sales milestones, subject to reduction up to $15.0 million related to amounts provided by the Company in advance of entering into this agreement, and provides for both parties' reimbursement of R&D expenses from future profits. Following the commercialization of the product, CPP and the Company will share profits in accordance with the agreement. The Company will manage the development of the product in North America.



5.6.Restructuring and Related Charges
In July 2016, the Company's Board of Directors approved a $100.0 million to $125.0 million restructuring program ("the 2016 Mallinckrodt Program") designed to further improve the Company's cost structure as it continues to transform the business. The 2016 Mallinckrodt Program is expected to include actions across both the Specialty Brands segment and the Specialty Generics segments,Disposal Group, as well as within corporate functions. The 2016 Mallinckrodt Program is substantially complete.
In February 2018, the Company's Board of Directors approved a $100.0 million to $125.0 million restructuring program ("the 2018 Mallinckrodt Program") that is of similar design as the 2016 Mallinckrodt Program. The utilization of the 2018 Mallinckrodt Program commenced upon substantial completion of the 2016 Mallinckrodt Program. There is no specified time period associated with the 20162018 Mallinckrodt Program.
In addition to the 2016 and 2018 Mallinckrodt Program,Programs, the Company takes certain restructuring actions to generate synergies from its acquisitions.
Net restructuring and related charges reflected in continuing operations by segment are as follows:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Specialty Brands$3.2
 $14.6
 $73.7
 $24.1
Corporate16.4
 1.5
 27.7
 4.3
Restructuring and related charges, net19.6
 16.1
 101.4
 28.4
Less: accelerated depreciation(4.9) (0.7) (4.9) (2.1)
Restructuring charges, net$14.7
 $15.4
 $96.5
 $26.3

 Three Months Ended Nine Months Ended
 September 29,
2017
 September 30,
2016
 September 29,
2017
 September 30,
2016
Specialty Brands$14.6
 $4.9
 $24.1
 $21.7
Specialty Generics(0.6) 0.7
 7.3
 2.3
Corporate1.5
 3.1
 4.3
 10.0
Restructuring and related charges, net15.5
 8.7
 35.7
 34.0
Less: accelerated depreciation(1.2) (1.9) (3.6) (4.8)
Restructuring charges, net$14.3
 $6.8
 $32.1
 $29.2


Net restructuring and related charges reflected in continuing operations by program are comprised of the following:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
2018 Mallinckrodt Program$5.2
 $
 $5.2
 $
2016 Mallinckrodt Program9.7
 16.1
 65.1
 28.4
Acquisition programs4.7
 
 31.1
 
Total19.6
 16.1
 101.4
 28.4
Less: non-cash charges, including accelerated depreciation and impairments(4.9) (0.7) (4.9) (2.1)
Total charges expected to be settled in cash$14.7
 $15.4
 $96.5
 $26.3





 Three Months Ended Nine Months Ended
 September 29,
2017
 September 30,
2016
 September 29,
2017
 September 30,
2016
2016 Mallinckrodt Program$15.5
 $8.3
 $35.7
 $8.3
2013 Mallinckrodt Program
 0.3
 
 22.7
Acquisitions
 0.1
 
 3.0
Total15.5
 8.7
 35.7
 34.0
Less: accelerated depreciation(1.2) (1.9) (3.6) (4.8)
Total charges expected to be settled in cash$14.3
 $6.8
 $32.1
 $29.2


The following table summarizes cash activity for restructuring reserves reflected in continuing operations, substantially all of which are related to contract termination costs and employee severance and benefits:
 2018 Mallinckrodt Program 2016 Mallinckrodt Program Acquisition Programs Total
Balance at December 29, 2017$
 $14.1
 $0.8
 $14.9
Charges2.2
 68.4
 29.9
 100.5
Changes in estimate
 (3.3) (0.7) (4.0)
Cash payments
 (11.5) (21.9) (33.4)
Reclassifications
 (1.0) 
 (1.0)
Currency translation
 0.7
 
 0.7
Balance at September 28, 2018$2.2
 $67.4
 $8.1
 $77.7

 2016 Mallinckrodt Program 2013 Mallinckrodt Program Acquisitions Total
Balance at December 30, 2016$9.5
 $5.1
 $0.2
 $14.8
Charges33.9
 
 
 33.9
Changes in estimate(1.8) 
 
 (1.8)
Cash payments(19.8) (3.7) (0.2) (23.7)
Reclassifications(0.7) 0.3
 
 (0.4)
Balance at September 29, 2017$21.1
 $1.7
 $
 $22.8




NetTotal Company net restructuring and related charges, including associated asset impairments, incurred cumulative-to-date related to the 2018 and 2016 Mallinckrodt Programs were as follows:
 2018 Mallinckrodt Program 2016 Mallinckrodt Program
Specialty Brands$3.0
 $80.0
Corporate2.2
 26.5
Specialty Generics Disposal Group
 14.4
 $5.2
 $120.9

On January 8, 2018, the Company announced that it would discontinue marketing of Raplixa® after an evaluation of strategic options. During the nine months ended September 29, 2018, the Company incurred restructuring expenses of $48.8 million under the 2016 Mallinckrodt Program, was as follows:consisting primarily of contract termination costs related to the production of Raplixa. Amounts paid in the future may differ from the amount currently recorded.
 2016 Mallinckrodt Program
Specialty Brands$31.3
Specialty Generics8.6
Corporate9.3
 $49.2
Substantially allAll of the restructuring reserves were included in accrued and other current liabilities on the Company's unaudited condensed consolidated balance sheets.



6.7.Income Taxes
The Company recognized an income tax benefit of $31.2$125.2 million on incomea loss from continuing operations before income taxes of $33.1$22.2 million for the three months ended September 28, 2018, and an income tax benefit of $57.8 million on a loss from continuing operations before income taxes of $4.7 million for the three months ended September 29, 2017, and an income tax benefit of $56.4 million on income from continuing operations before income taxes of $53.6 million for the three months ended September 30, 2016.2017. This resulted in effective tax rates of negative 94.3%564.0% and negative 105.2%1,229.8% for the three months ended September 28, 2018 and September 29, 2017, respectively. The income tax benefit for the three months ended September 28, 2018 is comprised of $16.1 million of current tax expense and September 30, 2016, respectively.$141.3 million of deferred tax benefit which is predominantly related to acquired intangible assets and the generation of net operating losses. The income tax benefit for the three months ended September 29, 2017 is comprised of $60.0$81.4 million of current tax benefit and $28.8$23.6 million of deferred tax expense. The net deferred tax expense of $28.8$23.6 million includes $45.5$50.7 million of deferred tax benefit which is predominantly related to acquired intangible assets offset by $74.3 million of deferred tax expense related to utilization of tax attributes.
The Company recognized an income tax benefit of $222.0 million on a loss from continuing operations before income taxes of $190.1 million for the nine months ended September 28, 2018, and an income tax benefit of $153.4 million on a loss from continuing operations before income taxes of $126.8 million for the nine months ended September 29, 2017. This resulted in effective tax rates of 116.8% and 121.0% for the nine months ended September 28, 2018 and September 29, 2017, respectively. The income tax benefit for the threenine months ended September 30, 201628, 2018 is comprised of $37.9$29.2 million of current tax expense and $94.3$251.2 million of deferred tax benefit which is predominantly related to acquired intangible assets.
The Company recognized an income tax benefitassets and the generation of $110.8 million on income from continuing operations before income taxes of $53.0 million for the nine months ended September 29, 2017, and an income tax benefit of $218.3 million on income from continuing operations before income taxes of $166.9 million for the nine months ended September 30, 2016. This resulted in effective tax rates of negative 209.1% and negative 130.8% for the nine months ended September 29, 2017 and September 30, 2016, respectively.net operating losses. The income tax benefit for the nine months ended September 29, 2017 is comprised of $20.5$13.6 million of current tax expensebenefit and $131.3$139.8 million of deferred tax benefit. The net deferred tax benefit of $131.3$139.8 million includes $232.8$241.3 million of deferred tax benefit, which is predominantly related to acquired intangible assets offset by $101.5 million of deferred tax expense related to utilization of tax attributes.
The income tax benefit was $125.2 million for the ninethree months ended September 30, 2016 is comprised of $85.9 million of current tax expense and $304.2 million of deferred28, 2018, compared with a tax benefit which is predominantly related to acquired intangible assets.
The effective tax rateof $57.8 million for the three months ended September 29, 2017, as compared with2017. The $67.4 million net increase in the tax benefit includes an increase of $82.3 million attributable to the tax benefit from the reorganization of the Company's intercompany financing and associated legal entity



ownership which occurred during the three months ended September 30, 2016 increased by 10.9 percentage points. Included within this net28, 2018, an increase wasof $17.3 million attributable to tax expense from a 109.4 percentage point increase related to the completion of certain aspects of the reorganization of the Company's legal entity ownership discussed further below, which occurred during the three months ended September 29, 2017. Also within this2017, an increase was a 36.7 percentage point increaseof $9.1 million attributable to the recognitiontax benefit from an adjustment to the provisional estimate of previously unrecognizedthe remeasurement of its net U.S. deferred tax benefits, which occurred duringliabilities resulting from U.S. Tax Reform, and an increase in tax benefit of $3.7 million attributable to the threeimpact of acquisitions occurring since September 29, 2017; partially offset by a decrease to tax benefit of $36.7 million attributable to the reduction in the U.S. federal corporate statutory rate resulting from U.S. Tax Reform, and a decrease in tax benefit of $8.3 million attributable to changes in the amount and jurisdictional mix of operating income.
The income tax benefit was $222.0 million for the nine months ended September 30, 2016. The remaining 135.2 percentage point decrease was primarily attributable to differing levels of income from continuing operations before taxes for the three months ended September 29, 2017 as28, 2018, compared with the three months ended September 30, 2016.
The effectivea tax ratebenefit of $153.4 million for the nine months ended September 29, 2017, as compared with2017. The $68.6 million net increase in the nine months ended September 30, 2016 decreased by 78.3 percentage points. Included within this net decrease was a 183.5 percentage point decrease primarilytax benefit includes an increase of $82.3 million attributable to differing levels of income from continuing operations before taxes for the nine months ended September 29, 2017 as compared with the nine months ended September 30, 2016. Of the remaining 105.2 percentage point increase, a 16.5 percentage point increase is related to the tax benefit from reorganization of a U.K. tax credit on a dividend between affiliates,the Company's intercompany financing and associated legal entity ownership which occurred during the nine months ended September 30, 2016,28, 2018, an increase of $27.1 million attributable to tax expense from the impact of dispositions predominately occurring during the nine months ended September 29, 2017, an increase of $17.3 million attributable to tax expense from a 5.0 percentage point increase related to the divestiturereorganization of the Intrathecal Therapy Business,legal entity ownership which occurred during the nine months ended September 29, 2017, a 15.5 percentage pointan increase in tax benefit of $11.8 million attributable to the recognitionimpact of previously unrecognizedacquisitions occurring since September 29, 2017, an increase of $9.1 million attributable to the tax benefits, which occurred withinbenefit from an adjustment to the nine months ended September 30, 2016,provisional estimate of the remeasurement of its net U.S. deferred tax liabilities resulting from U.S. Tax Reform, and an increase in tax benefit of $9.1 million attributable to changes in the amount and jurisdictional mix of operating income; partially offset by a decrease to tax benefit of $70.0 million attributable to the reduction in the U.S. federal corporate statutory rate from U.S. Tax Reform, and a 68.2 percentage point increase relateddecrease of $18.1 million attributable to tax benefit from the completion of certain aspectstermination of the reorganization of the Company's legal entity ownership discussed further below,defined benefit pension plans which occurred during the nine months ended September 29, 2017.
During the three months ended September 28, 2018, the Company initiated a reorganization of its intercompany financing and associated legal entity ownership in response to the changing global tax environment. As a result, the Company recognized current income tax expense of $1.0 million and a deferred income tax benefit of $83.3 million with a corresponding reduction to net deferred tax liabilities. The reduction in net deferred tax liabilities is comprised of a $67.0 million increase in deferred tax assets associated with tax loss and credit carryforwards, a $58.9 million increase in deferred tax liabilities associated with its investment in partnership, a $58.9 million decrease in deferred tax liabilities predominately associated with intangible assets and a $16.3 million decrease related to a change in valuation allowances as a result of the utilization of tax loss and credit carryforwards.
During the nine months ended September 28, 2018, and the fiscal year ended December 29, 2017, the three months ended December 30, 2016 and the twelve months ended September 30, 2016, the Company’snet cash paidpayments for income taxes net was $90.9 million, $95.6were $12.5 million and $165.4$73.4 million, respectively.


During the three and nine months ended September 29, 2017, the Company recognized an income tax benefit of $0.1 million and income tax expense of $5.2 million, respectively associated with the Nuclear Imaging business divestiture, as discussed in Note 3, in discontinued operations within the unaudited condensed consolidated statement of income.

On October 6, 2017 the Company completed a reorganization of its legal entity ownership (“the Reorganization”) to align with its ongoing transformation to become an innovation-driven specialty pharmaceuticals growth company. Many factors were considered in effecting the Reorganization, including streamlining treasury functions, simplifying legal entity reporting processes, and capital allocation efficiencies. During the three months ended September 29, 2017, the Company recognized income tax expense of $36.1 million, with an offset to deferred tax liabilities commensurate with the completion of certain aspects of the Reorganization during the third quarter of 2017. See Note 20 Subsequent Events for additional information related to the future tax effects of this Reorganization.
The Company early adopted ASU 2016-16 in the first quarter of 2017 utilizing the modified retrospective basis adoption method, with a cumulative-effect adjustment directly to retained earnings as of the beginning of the period for $75.0 million with an offsetting decrease of $67.2 million to other assets and a $7.8 million decrease to prepaid expenses on its unaudited condensed consolidated balance sheets. The prior periods were not restated.
The Company adopted ASU 2016-09 in the first quarter of 2017 and recorded an adjustment to retained earnings of $2.9 million to recognize net operating loss carryforwards, net of a valuation allowance, attributable to excess tax benefits on stock compensation that had not been previously recognized in additional paid-in capital.
The Company refined its acquisition accounting estimate associated with the measurement of its acquired Stratatech net deferred tax liabilities in the first quarter of 2017, resulting in a decrease to the acquired net deferred tax liabilities from $24.3 million to $22.1 million.
The InfaCareSucampo Acquisition resulted in a net deferred tax liability increase of $11.3$170.2 million. Significant components of this increase include $20.3$179.3 million of net deferred tax liabilities associated with intangiblesintangible assets and a $24.1 million deferred tax liability associated with inventories. The increase in deferred tax liabilities is partially offset by $8.7$29.4 million of deferred tax assets associated with non U.K.tax loss and credit carryforwards, and various other net operating losses.deferred tax assets of $3.8 million.
The divestituresale of a portion of the Intrathecal Therapy BusinessHemostasis business, inclusive of the PreveLeak and Recothrom products, was completed on March 17, 2017.16, 2018. This divestiture resulted in a net deferred tax liability increasedecrease of $38.9$3.0 million. Significant componentsA significant component of this increase include an increasedecrease includes a decrease of $56.5$3.0 million of deferred tax liability associated with future consideration,inventories. In addition, there was a decrease of $2.3$1.5 million associated with other deferred tax assets, a decrease of $2.4 million of deferred tax asset associated with net operating losses,tax loss and credit carryforwards, and a decrease of $17.9 million of deferred tax liability associated with intangibles, an increase of $2.6$4.2 million of deferred tax asset associated with committed product development, andintangible assets, all of which were offset by a decreasereduction in valuation allowance of $0.6 million of other net deferred tax assets.$8.1 million.
The Company's unrecognized tax benefits, excluding interest, totaled $123.0$192.3 million at September 29, 201728, 2018 and $118.7$182.5 million at December 30, 2016.29, 2017. The net increase of $4.3$9.8 million primarily resulted from a net increase to current year positions of $8.7 million, net decreases from prior period tax positions, predominately from acquired companies of $1.7$16.6 million, a net decrease from settlements of $2.0 million, and a net decreasesdecrease from lapse of statute of limitations of $2.7$4.8 million. If favorably settled, $121.3$179.5 million of unrecognized tax benefits at September 29, 201728, 2018 would favorably impactbenefit the effective tax rate.rate, of which up to $20.0 million may be reported in discontinued operations. The total amount of accrued interest related to these obligations was $6.8$18.0 million at September 29, 201728, 2018 and $7.1 million at December 30, 2016.29, 2017.
It is reasonably possible that within the next twelve months, as a result of the resolution of various U.K. and non-U.K. examinations, appeals and litigation and the expiration of various statutes of limitation, that the unrecognized tax benefits will decrease by up to $30.2$34.2 million and the amount of related interest and penalties will decrease by up to $4.4$5.7 million.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the TCJA. The TCJA reduces the U.S. federal corporate statutory rate from 35% to 21%, requires companies to pay a one-time transition tax on certain undistributed earnings of the Company's foreign subsidiaries of U.S. entities and creates new taxes on certain foreign sourced earnings. The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the TCJA. At September 28, 2018, the Company has not completed its accounting for all of the tax effects of the TCJA. As discussed below, the Company has recorded provisional estimates for certain provisions where the accounting is incomplete but a reasonable estimate can be made. In other cases, the Company continues to evaluate certain portions of the TCJA and the application of ASC 740 and no adjustments have been made in the unaudited condensed consolidated financial statements. In all cases, the Company will continue to



make and refine its calculations as additional analysis is completed. These estimates may also be affected as the Company gains a more thorough understanding of the tax law.
During fiscal 2017 the Company recorded a deferred tax benefit of $444.8 million for the provisional estimate of the remeasurement of its net U.S. deferred tax liabilities for the reduction in the U.S. federal corporate statutory tax rate to 21%. The provisional estimate was affected by other analyses related to the TCJA, including, but not limited to, having a U.S. tax return year that straddles the effective date of the statutory rate change and that is different than the Company's financial statement year. During the three and nine months ended September 28, 2018, on the basis of additional analysis related to certain tax calculations, the Company recognized an additional deferred tax benefit of $9.1 million, impacting the effective tax rate by 41.0 and 4.8 percentage points, respectively.
The one-time transition tax under the TCJA is based upon the amount of post-1986 cumulative undistributed earnings of certain of the Company's subsidiaries which was deferred from U.S. income tax under previous U.S. law. In fiscal 2017, the Company estimated this item would not result in any current or future tax. For the nine months ended September 28, 2018, no adjustments related to this provisional estimate have been made. While the Company is able to make a reasonable estimate of the impact of the one-time transition tax, additional information will continue to be gathered to finalize this conclusion.
Because of the complexity and uncertainties of the new global intangible low-taxed income rules, the Company continues to evaluate this portion of the TCJA and the application of ASC 740. Under GAAP, the Company is allowed to make an accounting policy choice of either (1) treating taxes due on future U.S. inclusions in taxable income related to global intangible low-taxed income as a current-period expense when incurred or (2) factoring such amounts into a company's measurement of its deferred taxes. The Company's selection of an accounting policy with respect to these new tax rules will depend on whether it expects to have future U.S. inclusions in taxable income related to global intangible low-taxed income and, if so, what the tax impact is expected to be. Whether the Company expects to have future U.S. inclusions in taxable income depends on not only the Company's current structure and estimated future results of global operations but also its intent and ability to modify its structure and/or business. While the Company estimates these rules will not have a material tax impact, it is not yet able to finalize the effect of this portion of the TCJA. Therefore, the Company has not made any adjustments related to this item in its unaudited condensed consolidated financial statements and has not made a policy decision regarding whether to record deferred taxes on global intangible low-taxed income.

7.8.Earnings per Share
Basic earnings per share is computed by dividing net income by the number of weighted-average shares outstanding during the period. Diluted earnings per share is computed using the weighted-average shares outstanding and, if dilutive, potential ordinary shares outstanding during the period. Potential ordinary shares represent the incremental ordinary shares issuable for restricted share units and share option exercises. The Company calculates the dilutive effect of outstanding restricted share units and share options on earnings per share by application of the treasury stock method. Dilutive securities, including participating securities, are not included in the computation of loss per share when the Company reports a net loss from continuing operations as the impact would be anti-dilutive.


The weighted-average number of shares outstanding used in the computations of basic and diluted earnings per share were as follows (in millions):
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Basic83.2
 96.7
 84.2
 99.5
Dilutive impact of restricted share units and share options1.8
 0.3
 1.0
 0.3
Diluted85.0
 97.0
 85.2
 99.8

 Three Months Ended Nine Months Ended
 September 29, 2017 September 30, 2016 September 29, 2017 September 30, 2016
Basic96.7
 107.6
 99.5
 109.1
Dilutive impact of restricted share units and share options0.3
 1.0
 0.3
 0.9
Diluted97.0
 108.6
 99.8
 110.0


The computation of diluted weighted-average shares outstanding for both the three and nine months ended September 28, 2018 excludes approximately 3.4 million shares of equity awards because the effect would have been anti-dilutive. The computation of diluted weighted-average shares outstanding for the three and nine months ended September 29, 2017 excludes approximately 4.3 million and 3.6 million shares of equity awards, respectively, because the effect would have been anti-dilutive. The computation of diluted weighted-average shares outstanding for the three and nine months ended September 30, 2016 excludes approximately 1.6 million and 1.7 million shares of equity awards, respectively, because the effect would have been anti-dilutive.









8.9.Inventories
Inventories were comprised of the following at the end of each period: 
 September 28,
2018
 December 29,
2017
Raw materials and supplies$22.0
 $23.7
Work in process91.3
 61.1
Finished goods30.1
 43.9
 $143.4
 $128.7

 September 29,
2017
 December 30,
2016
Raw materials and supplies$76.3
 $72.6
Work in process160.4
 178.4
Finished goods104.6
 99.7
 $341.3
 $350.7


9.10.Property, Plant and Equipment
The gross carrying amount and accumulated depreciation of property, plant and equipment at the end of each period was as follows:
 September 28,
2018
 December 29, 2017
Property, plant and equipment, gross$620.9
 $569.7
Less: accumulated depreciation(181.6) (156.5)
Property, plant and equipment, net$439.3
 $413.2

 September 29,
2017
 December 30, 2016
Property, plant and equipment, gross$1,820.4
 $1,679.4
Less: accumulated depreciation(858.0) (797.9)
Property, plant and equipment, net$962.4
 $881.5


Depreciation expense for property, plant and equipment was as follows:
 Three Months Ended Nine Months Ended
 September 28, 2018 September 29, 2017 September 28, 2018 September 29, 2017
Depreciation expense$15.1
 $12.0
 $38.4
 $37.8

 Three Months Ended Nine Months Ended
 September 29, 2017 September 30, 2016 September 29, 2017 September 30, 2016
Depreciation expense$27.3
 $27.3
 $83.5
 $87.6




10.11.Goodwill and Intangible Assets
The gross carrying amount and accumulated impairment of goodwill by segment at the end of each period werewas as follows:
 September 28, 2018 December 29, 2017
 Gross Carrying Amount Accumulated Impairment Gross Carrying Amount Accumulated Impairment
Specialty Brands$3,675.4
 $
 $3,482.7
 $

 September 29, 2017 December 30, 2016
 Gross Carrying Amount Accumulated Impairment Gross Carrying Amount Accumulated Impairment
Specialty Brands$3,459.5
 $
 $3,498.1
 $
Specialty Generics207.0
 (207.0) 207.0
 (207.0)
Total$3,666.5
 $(207.0) $3,705.1
 $(207.0)


During the nine months ended September 29, 2017,28, 2018, the gross carrying value of goodwill within the Specialty Brands segment decreasedincreased by $38.6$192.7 million. The decreaseincrease was primarily attributable to the Sucampo Acquisition, which yielded $244.7 million of goodwill, partially offset by $51.5 million of goodwill ascribed to the sale of the Intrathecal Therapy business to Piramal. The Company ascribed $49.8 million of goodwill to that business and it was factored into the gain on salea portion of the business. The decrease was offset by $13.3 million attributable toCompany's Hemostasis business, inclusive of the InfaCare Acquisition.PreveLeak and Recothrom products. The remaining change in goodwill was related to a purchase accounting adjustmentadjustments during the twelve month measurement period for previous acquisitions.

Stannsoporfin
On May 3, 2018, in a joint meeting, the FDA's Gastrointestinal Drugs Advisory Committee and Pediatric Advisory Committee (the "Advisory Committee") recommended that the risk benefit profile of the Company's stannsoporfin IPR&D product does not support approval for the Stratatech Acquisition primarily attributabletreatment of newborns ≥35 weeks of gestational age with indicators of hemolysis who are at risk of developing hyperbilirubinemia (severe jaundice).
On August 9, 2018, the Company received a complete response letter from the FDA related to its new drug application ("NDA") for stannsoporfin. In the letter, the FDA provided guidance regarding areas of further evaluation for resubmitting the stannsoporfin NDA for the treatment of newborns ≥35 weeks of gestational age with indicators of hemolysis who are at risk of developing



hyperbilirubinemia. While the timing of the development program has shifted outward, the Company continues to have conversations with the FDA to determine the best path forward. The Company will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated IPR&D asset of $113.5 million included within intangible assets, net on the unaudited condensed consolidated balance sheets as of September 28, 2018 and December 29, 2017. Refer to Note 18 for the associated impact on the Company's contingent consideration liability related to stannsoporfin.

VTS-270
VTS-270 is the Company’s development product to treat Niemann-Pick Type C, a complicated, ultra-rare neurodegenerative disease that typically presents in childhood and is ultimately fatal. The results of the Company’s recently completed registration trial for the product did not show a statistically significant separation from placebo. Neither the VTS-270 nor the placebo arm showed disease progression as would be expected for a neurodegenerative condition over 52 weeks of observation. The Company is in the process of evaluating this portion of the study in order to ensure the data was properly captured and of the highest quality. The FDA indicated to the Company at a Type A meeting in August 2018 that their view on the potential approvability will be based on the totality of data, not a single study or endpoint. Accordingly, the Company’s review of the data from the Phase 2b/3 trial, including the longer term open label portion, continues to proceed and is being assessed in combination with several other available data sources. A better understanding of the potential benefit of VTS-270 will emerge as the Company carefully considers the totality of data available and continues to work with the primary investigators and the FDA to determine the best path forward. The Company will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated IPR&D asset of $274.5 million included within intangible assets, net on the unaudited condensed consolidated balance sheet as of September 28, 2018.
The Company annually tests the indefinite-lived intangible assets for impairment, or whenever events or changes in deferred tax balances.circumstances indicate that the carrying value may not be recoverable by either a qualitative or income approach.  Management relies on a number of qualitative factors when considering a potential impairment such as changes to planned revenue or earnings that could affect significant inputs used to determine the fair value of the indefinite-lived intangible asset.
The gross carrying amount and accumulated amortization of intangible assets at the end of each period werewas as follows:
 September 28, 2018 December 29, 2017
 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Amortizable:       
Completed technology$10,278.4
 $2,656.4
 $9,693.0
 $2,126.1
Customer relationships28.7
 14.0
 29.5
 12.2
Trademarks75.3
 13.4
 75.5
 10.8
Other8.6
 8.6
 8.6
 8.6
Total$10,391.0
 $2,692.4
 $9,806.6
 $2,157.7
Non-Amortizable:       
Trademarks$35.0
   $35.0
  
In-process research and development851.6
   577.1
  
Total$886.6
   $612.1
  

 September 29, 2017 December 30, 2016
 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization
Amortizable:       
Completed technology$9,955.6
 $2,101.3
 $10,028.7
 $1,617.1
Licenses177.1
 120.1
 177.1
 112.7
Customer relationships30.0
 11.7
 27.6
 8.4
Trademarks82.2
 13.5
 82.1
 10.9
Other8.6
 8.6
 6.7
 6.7
Total$10,253.5
 $2,255.2
 $10,322.2
 $1,755.8
Non-Amortizable:       
Trademarks$35.0
   $35.0
  
In-process research and development512.6
   399.1
  
Total$547.6
   $434.1
  


Intangible asset amortization expense was as follows:
 Three Months Ended Nine Months Ended
 September 28, 2018 September 29, 2017 September 28, 2018 September 29, 2017
Amortization expense$184.2
 $169.3
 $544.8
 $508.4









 Three Months Ended Nine Months Ended
 September 29, 2017 September 30, 2016 September 29, 2017 September 30, 2016
Amortization expense$173.2
 $175.9
 $523.0
 $526.7


The estimated aggregate amortization expense on intangible assets owned by the Company is expected to be as follows:
Remainder of Fiscal 2018$184.2
Fiscal 2019737.2
Fiscal 2020736.9
Fiscal 2021736.6
Fiscal 2022609.6

Remainder of Fiscal 2017$172.6
Fiscal 2018686.7
Fiscal 2019686.3
Fiscal 2020686.0
Fiscal 2021685.8




11.12.Debt
Debt was comprised of the following at the end of each period:
September 29, 2017 December 30, 2016September 28, 2018 December 29, 2017
Principal Unamortized Discount and Debt Issuance Costs Principal Unamortized Discount and Debt Issuance CostsPrincipal Unamortized Discount and Debt Issuance Costs Principal Unamortized Discount and Debt Issuance Costs
Current maturities of long-term debt:              
Variable-rate receivable securitization due July 2017$
 $
 $250.0
 $0.3
3.50% notes due April 2018300.0
 0.4
 
 
$
 $
 $300.0
 $0.2
Term loan due March 2021
 
 20.0
 0.3
4.00% term loan due February 2022
 
 1.0
 
Term loan due September 202418.6
 0.2
 
 
12.3
 0.2
 14.0
 0.3
Term loan due February 20254.5
 0.1
 
 
ACOA (1) loan due December 2028
0.2
 
 
 
Capital lease obligation and vendor financing agreements0.2
 
 0.8
 

 
 0.2
 
Total current debt318.8
 0.6
 271.8
 0.6
17.0
 0.3
 314.2
 0.5
Long-term debt:              
3.50% notes due April 2018
 
 300.0
 0.9
4.875% notes due April 2020700.0
 6.3
 700.0
 8.2
700.0
 3.8
 700.0
 5.7
Variable-rate receivable securitization due July 2020200.0
 0.7
 
 
225.0
 0.5
 200.0
 0.7
Term loan due March 2021
 
 1,928.5
 33.4
4.00% term loan due February 2022
 
 5.5
 
9.50% debentures due May 202210.4
 
 10.4
 
10.4
 
 10.4
 
5.75% notes due August 2022884.0
 10.0
 884.0
 11.6
884.0
 8.0
 884.0
 9.5
8.00% debentures due March 20234.4
 
 4.4
 
4.4
 
 4.4
 
4.75% notes due April 2023526.5
 4.7
 600.0
 6.1
500.2
 3.7
 526.5
 4.5
5.625% notes due October 2023738.0
 10.1
 738.0
 11.4
731.4
 8.4
 738.0
 9.7
Term loan due September 20241,837.1
 27.7
 
 
1,601.5
 20.7
 1,837.2
 26.7
Term loan due February 2025592.5
 11.1
 
 
5.50% notes due April 2025692.1
 9.3
 695.0
 10.2
692.1
 8.0
 692.1
 9.0
ACOA loan due December 20281.6
 
 
 
Revolving credit facility
 6.3
 100.0
 3.2
300.0
 4.9
 900.0
 5.9
Total long-term debt5,592.5
 75.1
 5,965.8
 85.0
6,243.1
 69.1
 6,492.6
 71.7
Total debt$5,911.3
 $75.7
 $6,237.6
 $85.6
$6,260.1
 $69.4
 $6,806.8
 $72.2
(1)Atlantic Canada Opportunities Agency ("ACOA")
In April 2018, $300.0 million of the Company's 3.50% unsecured, fixed-rate notes matured and were repaid with cash on hand.
In March 2018, BioVectra entered into an agreement with the ACOA to obtain an interest-free loan of up to $5.0 million Canadian Dollars ("CAD") in exchange for specified investments in Canada. The loan is repayable in equal monthly installments over 10 years starting in January 2019. The Company has the option of prepaying this loan without any penalties. As of September 28, 2018, the outstanding principal under this agreement was approximately $1.8 million.
In February 2018, in conjunction with the Sucampo Acquisition, Mallinckrodt International Finance S.A. ("MIFSA") and Mallinckrodt CB LLC ("MCB") issued a $600.0 million senior secured term loan.  The variable-rate loan bears an interest rate of LIBOR plus 300 basis points and was issued with a discount of 25 basis points.  The incremental term loan requires quarterly principal amortization payments in an amount equal to 1.00% of the original principal balance of the incremental term loan, and may be reduced by making optional prepayments. The quarterly principal amortization is payable on the last day of each calendar quarter, which commenced on June 30, 2018, with the remaining principal balance due on February 24, 2025. The incremental term loan matures on February 24, 2025 under terms generally consistent with the term loan due September 2024.




In January 2018, the Company made a $225.0 million prepayment on its term loan due September 2024.  In making this payment, the Company satisfied certain obligations included within external debt agreements to reinvest proceeds from the sale of assets and businesses within one year of the respective transaction or use the proceeds to pay down debt. 
As of September 28, 2018, the applicable interest rate and outstanding borrowings on the Company's variable-rate debt instruments were as follows:
 Applicable interest rate Outstanding borrowings
Term loan due September 20245.14% $1,613.8
Term loan due February 20255.52% 597.0
Variable-rate receivable securitization3.16% 225.0
Revolving credit facility4.64% 300.0

As of September 28, 2018, the Company continues to be in full compliance with the provisions and covenants associated with its debt agreements. The Company's debt instruments are further described within the notes to the financial statements included within the Company's Annual Report filed on Form 10-K for the fiscal year ended September 30, 2016.December 29, 2017.
On July 28, 2017, Mallinckrodt Securitization S.à r.l. ("Mallinckrodt Securitization"), a wholly-owned special purpose subsidiary of the Company, entered into a $250.0 million accounts receivable securitization facility ("the Receivable Securitization") with a three year term. Mallinckrodt Securitization may, from time to time, obtain up to $250.0 million in third-party borrowings secured by certain receivables. The borrowings under the Receivable Securitization are to be repaid as the secured receivables are collected. Loans under the Receivable Securitization will bear interest (including facility fees) at a rate equal to one month LIBOR rate plus a margin of 0.9%. Unused commitments on the Receivables Securitization are subject to an annual commitment fee of 0.4%. The Receivable Securitization agreements contain customary representations, warranties, and affirmative and negative covenants. The size of the securitization facility may be increased to $300.0 million upon approval of the third-party lenders.

On February 28, 2017, Mallinckrodt International Finance, S.A. ("MIFSA") and Mallinckrodt CB LLC ("MCB") refinanced the March 2014 and August 2014 term loans, both of which were due in March 2021 ("the Existing Term Loans"). The refinanced term loans had an initial aggregate principal amount of $1,865.0 million, are due in September 2024 and bear interest at LIBOR plus 2.75% ("the 2017 Term Loan"). The 2017 Term Loan requires quarterly principal amortization payments in an amount equal to 0.25% of the original principal balance of the 2017 Term Loan payable on the last day of each calendar quarter, which commenced on June 30, 2017, with the remaining balance due on September 24, 2024. The Company accounted for the term loan refinancing as a debt modification.

In conjunction with the term loan refinancing, MIFSA and MCB replaced the existing revolving credit facility of $500.0 million due in March 2019 with a $900.0 million facility that matures on February 28, 2022 ("the 2017 Revolving Credit Facility"). The 2017 Revolving Credit Facility bears interest at LIBOR plus 2.25%. The 2017 Revolving Credit Facility reduced the letter of credit provision from $150.0 million to $50.0 million. Unused commitments under the 2017 Revolving Credit Facility are subject to an annual commitment fee of 0.275%. Fees applied to outstanding letters of credit is based on the interest rate applied to borrowings. The


2017 Revolving Credit Facility added certain wholly-owned subsidiaries of the Company as borrowers, in addition to Mallinckrodt plc, MIFSA and MCB.

The 2017 Term Loan and 2017 Revolving Credit Facility (collectively "the 2017 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. subsidiaries and certain of its other subsidiaries (collectively, "the Guarantors"). The 2017 Facilities are secured by a security interest in certain assets of MIFSA, MCB and the Guarantors. The 2017 Facilities contain customary affirmative and negative covenants, which include, among other things, restrictions on the Company's ability to declare or pay dividends, create liens, incur additional indebtedness, enter into sale and lease-back transactions, make investments, dispose of assets and merge or consolidate with any other person.

As a result of the 2017 Facilities financing transaction and the write-off of certain deferred financing costs associated with an $83.5 million payment on the Existing Term Loans, the Company recorded a $10.0 million charge included within the other expense line in the unaudited condensed consolidated statement of income.

As of September 29, 2017, the applicable interest rate on outstanding borrowings under the Company's revolving credit facility was approximately 3.58%, and there were no outstanding borrowings. As of September 29, 2017, the applicable interest rate on outstanding borrowings under the variable-rate receivable securitization was 2.13%, and outstanding borrowings totaled $200.0 million. At September 29, 2017, the applicable interest rate for the term loan due September 2024 was 4.08%, and outstanding borrowings totaled $1,855.7 million.
As of September 29, 2017, the Company continues to be in full compliance with the provisions and covenants associated with its debt agreements.


12.13.Retirement Plans
The net periodic benefit (credit) cost for the Company's defined benefit pension plans was as follows:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Service cost$0.1
 $
 $0.2
 $1.3
Interest cost0.2
 0.1
 0.5
 1.7
Expected return on plan assets
 
 
 (0.8)
Amortization of net actuarial loss0.1
 
 0.4
 1.8
Amortization of prior service cost
 
 0.1
 0.2
Plan settlements(3.4) 
 (3.4) 69.7
Net periodic benefit (credit) cost$(3.0) $0.1
 $(2.2) $73.9

 Three Months Ended Nine Months Ended
 September 29,
2017
 September 30,
2016
 September 29,
2017
 September 30,
2016
Service cost$

$0.6
 $1.5
 $1.4
Interest cost0.1

2.7
 2.2
 9.7
Expected return on plan assets

(4.1) (1.3) (12.5)
Amortization of net actuarial loss0.1

3.5
 2.7
 8.7
Amortization of prior service cost
 
 0.2
 
Plan settlements
 1.1
 69.7
 8.1
Net periodic benefit cost$0.2

$3.8
 $75.0
 $15.4


The net periodic benefit credit for the Company's postretirement benefit plans was approximately zero$0.1 million and $0.1 millionzero for the three months ended September 28, 2018 and September 29, 2017, and September 30, 2016, respectively, and $1.1 million and zero for both the nine months ended September 28, 2018 and September 29, 2017, and September 30, 2016respectively.

Of the net periodic benefit credit was approximately zero.

Net periodic benefit(credit) cost for the Company's defined benefit pension plans and postretirement benefit plans, wasonly service costs are included within other employee compensation costs recorded within cost of sales; researchsales, R&D, and development;SG&A expenses, while all other components of the net periodic benefit costs are included within other income and selling, general and administrative ("SG&A") expensesexpense on the unaudited condensed consolidated statements of income.


Pension Plan Termination
During the nine months ended September 29, 2017, the Company completed the third-party settlement of the remaining obligations of six defined benefit pension plans that were terminated during fiscal 2016. In conjunction with this final settlement, the Company made a $61.3 million cash contribution to the terminated plans and recognized a $69.7 million charge, includedrecorded as other income (expense), net within SG&A expenses.the unaudited condensed consolidated statement of income. During the three months ended September 28, 2018, the Company received a refund of $3.4 million of the initial cash contribution, recorded as other income (expense), net within the unaudited condensed consolidated statement of income.







13.14.Accumulated Other Comprehensive Income (Loss)Loss
The following summarizes the change in accumulated other comprehensive income (loss)loss for the nine months ended September 29, 201728, 2018 and September 30, 2016:29, 2017:
 Currency Translation Unrecognized Loss on Derivatives Unrecognized Loss on Benefit Plans 
Unrecognized Gain on Investment (1)
 
Accumulated Other Comprehensive Loss (1)
Balance at December 29, 2017$(8.2) $(4.7) $(1.5) $
 $(14.4)
Other comprehensive (loss) income before reclassifications(4.1) 
 4.3
 
 0.2
Amounts reclassified from accumulated other comprehensive loss
 0.7
 (5.2) 
 (4.5)
Net current period other comprehensive (loss) income(4.1) 0.7
 (0.9) 
 (4.3)
Balance at September 28, 2018$(12.3) $(4.0) $(2.4) $
 $(18.7)

(1)Upon adoption of ASU 2016-01, a reclassification of $1.5 million relating to the unrealized gain on investment resulted in an increase to beginning retained earnings with an offsetting decrease to accumulated other comprehensive loss. See Note 2 for additional details.
 Currency Translation Unrecognized Loss on Derivatives Unrecognized Loss on Benefit Plans Unrecognized Gain on Investment Accumulated Other Comprehensive Loss
Balance at December 30, 2016$(19.5) $(5.7) $(47.3) $
 $(72.5)
Other comprehensive income before reclassifications17.7
 
 5.6
 0.1
 23.4
Amounts reclassified from accumulated other comprehensive loss(4.7) 0.9
 39.8
 
 36.0
Net current period other comprehensive income13.0
 0.9
 45.4
 0.1
 59.4
Balance at September 29, 2017$(6.5) $(4.8) $(1.9) $0.1
 $(13.1)

 Currency Translation Unrecognized Gain (Loss) on Derivatives Unrecognized Gain (Loss) on Benefit Plans Unrecognized Gain on Equity Securities Accumulated Other Comprehensive Income (Loss)
Balance at December 30, 2016$(19.5) $(5.7) $(47.3) $
 $(72.5)
Other comprehensive income before reclassifications17.7
 
 5.3
 0.1
 23.1
Amounts reclassified from accumulated other comprehensive income(4.7) 0.9
 40.1
 
 36.3
Net current period other comprehensive income13.0
 0.9
 45.4
 0.1
 59.4
Balance at September 29, 2017$(6.5) $(4.8) $(1.9) $0.1
 $(13.1)


 Currency Translation Unrecognized Gain (Loss) on Derivatives Unrecognized Gain (Loss) on Benefit Plans Unrecognized Gain on Equity Securities Accumulated Other Comprehensive Income (Loss)
Balance at December 25, 2015$(7.9) $(6.3) $(51.1) $
 $(65.3)
Other comprehensive income (loss) before reclassifications10.2
 
 (39.5) 
 (29.3)
Amounts reclassified from accumulated other comprehensive income(0.7) 0.4
 9.3
 
 9.0
Net current period other comprehensive income (loss)9.5
 0.4
 (30.2) 
 (20.3)
Balance at Balance at September 30, 2016$1.6
 $(5.9) $(81.3) $
 $(85.6)

The following summarizes reclassifications from accumulated other comprehensive incomeloss for the nine months ended September 28, 2018 and September 29, 2017 and September 30, 2016:2017:
Amount Reclassified from
Accumulated Other Comprehensive Income
 
Amount Reclassified from
Accumulated Other Comprehensive Loss
 
Nine Months Ended  Nine Months Ended  
September 28,
2018
 September 29,
2017
 
Line Item in the Unaudited Condensed Consolidated
Statement of Income
Currency translation$
 $(4.7) Income from discontinued operations, net of income taxes
September 29,
2017
 September 30,
2016
 
Line Item in the Unaudited Condensed Consolidated
Statement of Income
    
Amortization and other of unrealized loss on derivatives$1.1
 $0.6
 Interest expense0.7
 1.1
 Interest expense
Income tax provision(0.2) (0.2) Income tax benefit
 (0.2) Income tax benefit
Net of income taxes0.9
 0.4
 0.7
 0.9
 
        
Amortization of pension and post-retirement benefit plans:        
Net actuarial loss2.8
 8.8
 
(1) 
0.4
 1.8
 
(1)  
Prior service credit(1.6) (2.1) 
(1) 
(1.5) (1.0) 
(1)  
Divestiture of discontinued operations(3.1) 
 Income from discontinued operations, net of income taxes
 (3.1) Income from discontinued operations, net of income taxes
Plan settlements69.7
 8.1
 
(1) Selling, general and
     administrative expenses
(4.1) 69.7
 
(1)  
Total before tax67.8
 14.8
 (5.2) 67.4
 
Income tax provision(27.7) (5.5) Income tax benefit
 (27.6) Income tax benefit
Net of income taxes40.1
 9.3
 (5.2) 39.8
 
Currency translation(4.7) (0.7) Income from discontinued operations, net of income taxes
    
Total reclassifications for the period$36.3
 $9.0
 $(4.5) $36.0
 
(1)
These accumulated other comprehensive incomeloss components are included in the computation of net periodic benefit cost. See Note 12 13 for additional details.









14.15.Equity


Share Repurchases

On November 19, 2015, the Company's Board of Directors authorized a $500.0 million share repurchase program (the "November 2015 Program"), which was completed in the three months ended December 30, 2016. On March 16, 2016, the Company's Board of Directors authorized an additionala $350.0 million share repurchase program (the "March 2016 Program"), which was completed during the three months ended March 31, 2017. On March 1, 2017, the Company's Board of Directors authorized an additional $1.0 billion share repurchase program (the "March 2017 Program"), which commenced upon the completion of the March 2016 Program. The March 2017 Program has no time limit or expiration date, and the Company currently expects to fully utilize the program.


 
March 2017
Repurchase Program
 
March 2016
Repurchase Program
 Number of Shares Amount Number of Shares Amount
Authorized repurchase amount  $1,000.0
   $350.0
Repurchases:       
Transition Period 2016 (1)

 
 1,501,676
 84.0
Fiscal 201713,490,448
 380.6
 5,366,741
 266.0
Fiscal 20183,610,968
 55.2
 
 
Remaining amount available  $564.2
   $

 March 2017 Repurchase Program 
March 2016
Repurchase Program
 November 2015 Repurchase Program
 Number of Shares Amount Number of Shares Amount Number of Shares Amount
Authorized repurchase amount  $1,000.0
   $350.0
   $500.0
Repurchases:           
   Fiscal 2016 (1)

 
 
 
 6,510,824
 425.6
Transition Period 2016
 
 1,501,676
 84.0
 1,063,337
 74.4
Fiscal 20174,111,722
 167.0
 5,366,741
 266.0
 
 
Remaining amount available  $833.0
   $
   $

(1)Represents the Company's historical fiscal year ending on the last Friday in September.

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

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


15.16.Guarantees
In disposing of assets or businesses, the Company has historicallyfrom time to time provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. The Company assesses the probability of potential liabilities related to such representations, warranties and indemnities and adjusts potential liabilities as a result of changes in facts and circumstances. The Company believes, given the information currently available, that their ultimate resolutions will not have a material adverse effect on its financial condition, results of operations and cash flows.
In connection with the sale of the Specialty Chemicals business (formerly known as Mallinckrodt Baker) in fiscal 2010, the Company agreed to indemnify the purchaser with respect to various matters, including certain environmental, health, safety, tax and other matters. The indemnification obligations relating to certain environmental, health and safety matters have a term of 17 years from the sale, while some of the other indemnification obligations have an indefinite term. The amount of the liability relating to all of these indemnification obligations included in other liabilities on the Company's unaudited condensed consolidated balance sheets as of September 28, 2018 and December 29, 2017 and December 30, 2016 was $14.9$14.3 million and $15.1$14.9 million, respectively, of which $12.2$11.6 million and $12.4$12.1 million, respectively, related to environmental, health and safety matters. The value of the environmental, health and safety indemnity was measured based on the probability-weighted present value of the costs expected to be incurred to address environmental, health and safety claims made under the indemnity. The aggregate fair value of these indemnification obligations did not differ significantly from their aggregate carrying value at September 29, 201728, 2018 and December 30, 2016.29, 2017. As of September 29, 2017,28, 2018, the maximum future payments the Company could be required to make under these indemnification obligations were $70.2 million. The Company was required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $18.2$18.5 million and $19.0$18.3 million remained in restricted cash, included in long-term other assets on the unaudited condensed consolidated balance sheets at September 29, 201728, 2018 and December 30, 2016,29, 2017, respectively.
The Company has recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 16.17.
The Company is also liable for product performance; however, the Company believes, given the information currently available, that theirthe ultimate resolutionsresolution of any such claims will not have a material adverse effect on its financial condition, results of operations and cash flows.


The Company was previously 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. Following the sale of the Nuclear Imaging business, the surety bond was canceled in April 2017 and the Company is no longer required to provide financial assurance to the U.S. Nuclear Regulatory Commission for that facility. As of September 29, 2017,28, 2018, the Company had various other letters of credit, guarantees and surety bonds totaling $29.1$22.5 million.
As part of the Company's legal separation, the Company entered into a separation and distribution agreement with Covidien plc ("Covidien"), which was subsequently acquired by Medtronic plc. Such agreement 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.





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


Governmental Proceedings
Opioid Related Matters
Multidistrict Litigation.The Company, has been named in several lawsuits filed in federal court brought by various counties and cities, along with other opioid manufacturers and often, distributors.distributors, has been named in lawsuits brought by various counties, cities, Native American tribes, hospitals, health care clinics, Medicaid managed care organizations, and third-party payers. In general, the lawsuits assert claims of public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”("RICO") or similar state laws, consumer fraud, deceptive trade practices, insurance fraud, unjust enrichment and other common law claims arising from defendants’defendants' manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys’attorneys' fees and costs. These claims have beenlawsuits were originally filed against, or amended to include, the Company in thevarious U.S. District Court forCourts or in state courts with the Southern District of Illinois (October 26, 2017 and October 27, 2017), thestate court lawsuits subsequently removed to U.S. District Court forCourts. On December 5, 2017, the Southern District of Ohio (between September 22, 2017 and November 6, 2017), the U.S. District Court forJudicial Panel in Multidistrict Litigation ("JPML") issued its order establishing a Multidistrict Litigation ("MDL") in the Northern District of Alabama (October 25, 2017),Ohio for opioid litigation cases and transferring those cases to the U.S. District Court for the Eastern District of Michigan (October 12, 2017), and theMDL that were originally filed in U.S. District Courts foror removed to U.S. District Courts from state court.  There are currently 1,275 lawsuits naming the Eastern and Western Districts of Kentucky (between October 3 and October 30, 2017).Company that either are in the MDL or are expected to be transferred to the MDL. The Company intends to vigorously defend itself in these matters.
State Court Lawsuits.On June 13, 2017,July 12, 2018, the District AttorneysCommonwealth of Kentucky, through its Attorney General, of Tennessee’s First, Second and Third Judicial Districts and Baby Doe jointly filed a lawsuit in Circuit Court for Sullivan County in Kingsport, Tennessee against certain prescription opioid manufacturers, including the Company, and other parties. The lawsuit alleges violations of Tennessee’s Drug Dealer Liability Act and public nuisance laws arising out of defendants’ alleged opioid sales and marketing practices, seeking restitution, damages, injunctive and other relief and attorneys’ fees and costs. On September 29, 2017, a similar lawsuit was filed against the Company and other parties by several other Tennessee District Attorneys General and two Baby Doessuit in the Circuit Court for Campbell County in Jacksboro, Tennessee and generally parallels the claims in the Sullivan County lawsuit and seeks similar relief. On August 3, 2017, a lawsuit was filed in MultnomahMadison County Circuit Court in Oregon byKentucky against the CountyCompany. The lawsuit asserts violations of Multnomah against certain prescription opioid manufacturers, including the Company, as well as distributorsKentucky Consumer Protection Act, Medicaid Fraud Statute and healthcare providers, assertingAssistance Program Fraud Statute, asserts claims of public nuisance, abnormally dangerous activity, fraud, and negligence and seekingunjust enrichment, and seeks relief similar to that sought in the Tennesseeother state and federal actions.
On May 15, 2018, the State of Florida, through its Attorney General, filed suit in the Circuit Court of the Sixth Judicial Circuit in and for Pasco County in Florida against certain opioid distributors and manufacturers, including the Company. The lawsuit asserts violations of the Florida Deceptive and Unfair Trade Practices and RICO, asserts claims of public nuisance and negligence and seeks relief similar to that sought in other state and federal actions.
On December 20, 2017, the State of New Mexico, through its Attorney General, amended its lawsuit pending in the First Judicial District Court in the County of Santa Fe against certain opioid distributors and manufacturers, to add the Company. The lawsuit asserts violations of public nuisance laws and the New Mexico Unfair Practices, Medicaid Fraud and Racketeering Acts and seeks relief similar to that sought in other state and federal actions.
In addition, the Company is currently named in 88 lawsuits pending in state courts in Alabama (1), Arkansas (1), Connecticut (2), Florida (2), Georgia (1), Illinois (3), Louisiana (2), Maryland (1), Massachusetts (2), Missouri (1), Nevada (1), New Hampshire (8), New York (16), Oklahoma (1), Pennsylvania (10), Tennessee (3), Texas (12), Utah (7), Virginia (12) and West Virginia (2). These state lawsuits are brought on behalf of cities, counties, towns, third party payers, individuals, and hospitals. The lawsuits assert claims and seek damages similar to those sought in the cases pending before the MDL. The Company intends to vigorously defend itself in these state court matters.
Investigations.The Company has also received various subpoenas and requests for information related to the distribution, marketing and sale of the Company’sCompany's opioid products. On July 26, 2017, the Company received a subpoena from the Department of Justice ("DOJ"), on August 24, 2017, the Company received a Civil Investigative Demand (“CID”("CID") from the Missouri Attorney General’sGeneral's Office, and on September 22, 2017, the Company received a subpoena from the New Hampshire Attorney General’s Office. General's Office, on January 9, 2018, the Company received a subpoena and CID from the Kentucky Attorney General's Office, on January 16, 2018, the Company received a CID from the Attorney General's Office for the State of Washington, on February 5, 2018, the Company received a subpoena from the Attorney General's Office for the State of Alaska, on May 15, 2018, the Company received a CID from the Attorney General's Office for the State of South Carolina, and on September 25, 2018, the Company received a CID from the Attorney General's Office for Puerto Rico.



In addition, on January 27, 2018 the Company received a grand jury subpoena from the U.S. Attorneys' Office ("USAO") for the Southern District of Florida for documents related to the Company's distribution, marketing and sale of its oxymorphone generic products.
The Company is in the process of responding to these subpoenas and CIDs.
The Company has been contacted by the CID,coalition of State Attorneys General investigating the role manufacturers and distributors may have had in contributing to the increased use of opioids in the U.S.
On August 2, 2018, Energy and Commerce Committee leaders in the U.S. House of Representatives sent a letter to the Company requesting information about the Company's efforts to monitor its opioid sales for suspicious orders. The Company is in the process of responding to this letter.
The Company intends to cooperate fully in these investigations.
Since these lawsuits and investigations are in early stages, the Company is unable to predict their outcome or estimate a range of reasonably possible losses.
Other Matters
Generic Pricing Subpoena. In March 2018, the Company received a grand jury subpoena issued by the U.S. District Court for the Eastern District of Pennsylvania pursuant to which the Antitrust Division of the Department of Justice is seeking documents regarding generic products and pricing, communications with generic competitors and other related matters. The Company is in the process of responding to this subpoena, and the Company intends to cooperate fully in these investigations.the investigation.
SEC Subpoena. In January 2017, the Company received a subpoena from the SEC for documents related to the Company’sCompany's public statements, filings and other disclosures regarding H.P. Acthar® Gel sales, profits, revenue, promotion and pricing. The Company has responded to this subpoena, and in February 2018, the SEC notified the Company intends to cooperate fully inthat it had concluded its investigation and that no enforcement action was recommended against the investigation.Company.
Boston Subpoena. In December 2016, the Company received a subpoena from the United States Attorney’s Office ("USAO")USAO for the District of Massachusetts for documents related to the Company’sCompany's provision of financial and other support to patients, including


through charitable foundations, and related matters. The Company is in the process of responding to this subpoena, and the Company intends to cooperate fully in the investigation.
Texas Pricing Investigation. In November 2014, the Company received a CID from the Civil Medicaid Fraud Division of the Texas Attorney General's Office. According to the CID, the Attorney General's office is investigating the possibility of false reporting of information by the Company regarding the prices of certain of its drugs used by Texas Medicaid to establish reimbursement rates for pharmacies that dispensed the Company's drugs to Texas Medicaid recipients. The Company is in the process of respondinghas responded to these requests.
Mallinckrodt Inc. v. U.S. Food and Drug Administration et al. and United States of America.In November 2014, the Company filed a Complaint ("the Complaint") in the U.S. District Court for the District of Maryland Greenbelt Division against the FDA and the United States for judicial review of what the Company believes is the FDA's inappropriate and unlawful reclassification of the Company's Methylphenidate HCl Extended-Release tablets USP (CII) ("Methylphenidate ER") in the Orange Book: Approved Drug Products with Therapeutic Equivalence ("Orange Book") on November 13, 2014.. The Company also sought a temporary restraining order ("TRO") directing the FDA to reinstate the Orange Book AB rating for the Company's Methylphenidate ER products. The court denied the Company's motion for a TRO and in July 2015, the court granted the FDA’sFDA's motion to dismiss with respect to three of the five counts in the Complaint and granted summary judgment in favor of the FDA with respect to the two remaining counts.  The Company appealed the court’scourt's decision to the U.S. Court of Appeals for the Fourth Circuit. On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of the Company's Abbreviated New Drug Application ("ANDA") for Methylphenidate ER. On October 21, 2016, the United States Court of Appeals for the Fourth Circuit issued an order placing that litigation in abeyance pending the outcome of the withdrawal proceedings. The Company concurrently submitted to the FDA requests for a hearing in the withdrawal proceeding and for an extension of the deadline for submitting documentation supporting the necessity of a hearing.  The FDA granted the Company’sCompany's initial request to extend the deadline, and on February 21, 2017, the FDA suspended the deadline in order to give the Center for Drug Evaluation and Research ("CDER") an opportunity to complete its production of documents. CDER shared an initial set of documents with the Company in June 2017 and isa second set of documents in October 2017. Following the processCompany's receipt of completing productionthe October tranche of documents from CDER, the Company presented a supplemental document request to CDER to ensure all of its initial document requests were fulfilled, and on February 13, 2018, CDER provided a final set of documents in response to the Company. TheCompany's requests. In April 2018, the Company is preparing the supporting documentation forfiled its submission and plans to vigorously set forthin support of its position in the withdrawal proceedings.
Therakos Investigation. In March 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation A potential outcome of the U.S. promotion of Therakos’ immunotherapy drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively,withdrawal proceedings is that the "Therakos System"), for indications not approved by theCompany's Methylphenidate ER products may lose their FDA including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos’ efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, UVADEX/UVAR. In August 2015, the USAO for the Eastern District of Pennsylvania sent Therakos a subsequent request for documents related to the investigation and has since made certain related requests. The Company is in the process of responding to these requests.approval.
FTC Investigation. In June 2014, Questcor Pharmaceuticals, Inc. ("Questcor") received a subpoena and CID from the FTCFederal 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 MNK-1411 (the product formerly described as Synacthen Depot®) from Novartis AG and Novartis Pharma AG (collectively, "Novartis") violates antitrust laws. Subsequently, California, Maryland, Texas, Washington, New York and Alaska (collectively, "the Investigating States") commenced similar investigations focused on whether the transaction



violates state antitrust laws. On January 17, 2017, the FTC, all Investigating States (except California) ("the Settling States") and the Company entered into an agreement to resolve this matter for a one-time cash payment of $102.0 million and an agreement to license MNK-1411Synacthen Depot to a third party designated by the FTC for possible development in Infantile Spasms ("IS") and Nephrotic Syndrome ("NS") in the U.S. To facilitate that settlement, a complaint was filed on January 18, 2017, in the U.S. District Court for the District of Columbia. The settlement was approved by the court on January 30, 2017. On July 16, 2017, the Company announced the completion of the U.S. license of both the Synacthen trademark and certain intellectual property associated with MNK-1411Synacthen Depot to West Pharmaceuticals to develop and pursue possible FDA approval of the product in IS and NS. The Company retains the right to develop MNK-1411 (the product formerly described as Synacthen Depot) for all other indications in the U.S. and retains rights to the Synacthen trademark outside the U.S.
Questcor DOJTherakos Investigation. In September 2012,Questcor received a subpoena fromMarch 2014, the USAO for the Eastern District of Pennsylvania requested the production of documents related to an investigation of the U.S. promotion of Therakos'® drug/device system UVADEX/UVAR XTS and UVADEX/CELLEX (collectively, the "Therakos System"), for informationindications not approved by the FDA, including treatment of patients with graft versus host disease ("GvHD") and solid organ transplant patients, including pediatric patients. The investigation also includes Therakos' efforts to secure FDA approval for additional uses of, and alleged quality issues relating to, its promotional practices related to Acthar. Questcor has also been informed byUVADEX/UVAR. In August 2015, the USAO for the Eastern District of Pennsylvania thatsent Therakos a subsequent request for documents related to the USAO for the Southern District of New Yorkinvestigation and the SEC are participatinghas since made certain related requests. The Company is in the investigationprocess of responding to review Questcor's promotional practices and related matters related to Acthar. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to Acthar.these requests.
DEA Investigation. In November 2011 and October 2012, the Company received subpoenas from the U.S. Drug Enforcement Administration ("DEA") requesting production of documents relating to its suspicious order monitoring program for controlled substances. The USAO for the Eastern District of Michigan is investigatinginvestigated the possibility that the Company failed to report suspicious orders of controlled substances during the period 2006-2011 in violation of the Controlled Substances Act and its related regulations. The USAO for the Northern District of New York and Office of Chief Counsel for the U.S. Drug Enforcement Administration ("DEA") are investigatingDEA investigated the possibility that the Company failed to maintain appropriate records and security measures with respect to manufacturing of certain controlled substances at its Hobart, New York facility during the period 2012-2013. OnIn July 11, 2017, the Company


entered into a final settlement with the DEA and the USAOs for the Eastern District of Michigan and the Northern District of New York to settle these investigations. As part of the agreement, the Company paid $35.0 million to resolve all potential claims.

Questcor DOJ Investigation. In September 2012,Questcor received a subpoena from the USAO for the Eastern District of Pennsylvania for information relating to its promotional practices related to H.P. Acthar Gel. Questcor has also been informed by the USAO for the Eastern District of Pennsylvania that the USAO for the Southern District of New York and the SEC were participating in the investigation to review Questcor's promotional practices and related matters related to H.P. Acthar Gel. On March 9, 2015, the Company received a "No Action" letter from the SEC regarding its review of the Company's promotional practices related to H.P. Acthar Gel. The Company intends to cooperate fully in the investigation.

Patent Litigation
Amitiza Patent Litigation:  Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc..  In October 2018, Sucampo AG, Sucampo Pharmaceuticals, Inc. and Sucampo Pharma LLC, subsidiaries of the Company, and Takeda Pharmaceutical Company Limited, Takeda Pharmaceuticals USA, Inc., and Takeda Pharmaceuticals America, Inc. (collectively "Takeda," the exclusive licensee under the patents in litigation) filed suit in the U.S. District Court for the District of New Jersey against Sun Pharmaceutical Industries, Ltd. and Sun Pharmaceutical Industries, Inc. (collectively “Sun”) alleging that Sun infringed U.S. Patent Nos. 7,795,312, 8,026,393, 8,097,653, 8,338,639, 8,389,542, 8,748,481 and 8,779,187 following receipt of a September 2018 notice from Sun concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza.  The Company intends to vigorously enforce its intellectual property rights relating to Amitiza.
Amitiza Patent Litigation: Teva Pharmaceuticals USA, Inc. In September 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Teva Pharmaceuticals USA, Inc. ("Teva")alleging that Teva infringed U.S. Patent Nos. 6,414,016, 6,982,283, 7,795,312, 8,026,393, 8,071,613, 8,097,653, 8,338,639, 8,389,542 and 8,748,481 following receipt of an August 2017 notice from Teva concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Teva was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.
Amitiza Patent Litigation: Amneal Pharmaceuticals, LLC. In April 2017, Sucampo AG and Sucampo Pharmaceuticals, Inc., subsidiaries of the Company, and Takeda filed suit in the U.S. District Court for the District of New Jersey against Amneal Pharmaceuticals, LLC ("Amneal")alleging that Amneal infringed U.S. Patent Nos. 6,982,283, 8,026,393, 8,097,653, 8,338,639 and 8,389,542 following receipt of a March 2017 notice from Amneal concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Amitiza. On June 28, 2018, the parties entered into a settlement agreement under which Amneal was granted the non-exclusive right to market a competing lubiprostone product in the U.S. under its ANDA on or after January 1, 2023, or earlier under certain circumstances.



Amitiza Patent Litigation:Par and DRL. Settlement and License Agreements were entered into with Anchen Pharmaceuticals, Inc., Par Pharmaceutical, Inc. and Par Pharmaceutical Companies, Inc. (collectively "Par") and Dr. Reddy's Laboratories, Inc. and Dr. Reddy's Laboratories, Ltd. (collectively "DRL") to settle Paragraph IV patent litigation with each of Par and DRL. Under the terms of the Par settlement dated September 30, 2014, Par was granted a non-exclusive license and right to market a competing generic of Amitiza on or after January 1, 2021, or earlier under certain circumstances. Under the terms of the DRL settlement dated September 14, 2016, DRL was granted a non-exclusive license and right to market a competing generic of Amitiza on or after January 1, 2023, or earlier under certain circumstances.
Inomax Patent Litigation: Praxair Distribution, Inc. and Praxair, Inc. (collectively "Praxair"). In February 2015, INO Therapeutics LLC and Ikaria, Inc., subsidiaries of the Company, filed suit in the U.S. District Court for the District of Delaware against Praxair following receipt of a January 2015 notice from Praxair concerning its submission of an ANDA containing a Paragraph IV patent certification with the FDA for a generic version of Inomax.Inomax®. In July 2016, the Company filed a second suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning three additional patents recently added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for a generic version of Inomax. The infringement claims in the second suit have been added to the original suit. In September 2016, the Company filed a third suit against Praxair in the U.S. District Court for the District of Delaware following receipt of a Paragraph IV notice concerning a fourth patent recently added to the FDA Orange Book that was submitted by Praxair regarding its ANDA for a generic version of Inomax.
The Company intends to vigorously enforce its intellectual property rights relating to Inomax in both the Inter Partes Review ("IPR") and Praxair litigation proceedings to prevent the marketing of infringing generic products prior to the expiration of the patents covering Inomax. Trial of the suit filed in February 2015 was held in March 2017 and a decision was rendered September 5, 2017 that ruled five patents invalid and six patents not infringed. The Company has appealed the decision to the Court of Appeals for the Federal Circuit. Praxair received FDA approval of their ANDA for their Noxivent nitric oxide and clearance of their 510(k) for their NOxBOXi device on October 2, 2018.  An adverse outcome in the appeal of the Praxair litigation decision ultimately(or a decision by Praxair to launch at-risk prior to the appellate decision) could result in the launch of a generic version of Inomax before the expiration of the last of the listed patents on February 19, 2034 (August 19, 2034May 3, 2036 (November 3, 2036 including pediatric exclusivity), which could adversely affect the Company's ability to successfully maximize the value of Inomax and have an adverse effect on its financial condition, results of operations and cash flows.
Inomax Patents: IPR Proceedings. In February 2015 and March 2015, the U.S. Patent and Trademark Office ("USPTO") issued Notices of Filing Dates Accorded to Petitions for IPR petitions filed by Praxair Distribution, Inc. concerning ten patents covering Inomax (i.e., five patents expiring in 2029 and five patents expiring in 2031).
In July 2015 the USPTO Patent Trial and Appeal Board ("PTAB") issued rulings denying the institution of four of the five IPR petitions challenging the five patents expiring in 2029.  The PTAB also issued a ruling in July 2015 that instituted the IPR proceeding in the fifth of this group of patents and the PTAB ruled in July 2016 that one claim of this patent survived review and is valid while the remaining claims were unpatentable.  The Company believesbelieved the claim held valid claimby the PTAB describes and encompasses thea manner in which Inomax is distributed in conjunction with its approved labeling and that Praxair infringes that claim. Praxair filed an appeal and the CompanyMallinckrodt filed a cross-appeal of this decision to the Court of Appeals for the Federal Circuit. Oral argument of that appeal occurred in January 2018. The Federal Circuit decision was issued May 16, 2018 and held all claims unpatentable (invalid).
In March 2016, Praxair Distribution, Inc. submitted additional IPR petitions for the five patents expiring in 2029. The PTAB issued non-appealable rulings in August and September 2016 denying institution of all five of these additional IPR petitions. This group of five patents are those patents ruled invalid by the District Court in the September 5, 2017 decision.
In September 2015 the USPTO PTAB issued rulings that instituted the IPR proceedings in each of the second set of five patents that expire in 2031. In September 2016 the PTAB ruled that all claims in the five patents expiring in 2031 are patentable. Three
Ofirmev Patent Litigation: Aurobindo Pharma U.S.A., Inc. In December 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP Unlimited Group, subsidiaries of thesethe Company, and New Pharmatop L.P. ("Pharmatop"), the current owner of the two U.S. patents were assertedlicensed exclusively by the Company, filed suit in the Praxair litigation and part of the six patents ruled not infringed byU.S. District Court for the District Courtof Delaware against Aurobindo Pharma U.S.A., Inc. ("Aurobindo") alleging that Aurobindo infringed U.S. Patent No. 6,992,218 ("the '218 patent"), U.S. Patent No. 9,399,012 ("the '012 patent") and U.S. Patent No. 9,610,265 ("the '265 patent") following receipt of a November 2017 notice from Aurobindo concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev®. On May 7, 2018 the parties entered into a settlement agreement under which Aurobindo was granted the non-exclusive right to market a competing intravenous acetaminophen product in the September 5, 2017 decision.U.S. under its ANDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: B. Braun Medical Inc.In April 2017, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP, subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against B. Braun Medical Inc. ("B. Braun") alleging that B. Braun infringed U.S. Patent Nos. 6,992,218 ("the ‘218 patent")'218 patent and 9,399,012 ("the ‘012 patent")'012 patent following receipt of a February 2017 notice from B. Braun concerning its submission of a New Drug Application ("NDA"), containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. Following receipt ofOn October 3, 2018, the parties entered into a second Paragraph IV notice letter fromsettlement agreement under which B. Braun on April 24, 2017 directedwas granted the non-exclusive right to the ‘012 patent, Mallinckrodt Hospital Products Inc. and Mallinckrodt IP filed suit in June 2017market a competing intravenous acetaminophen product in the U.S. District Court for the District of Delaware against B. Braun alleging that B. Braun infringed the ‘012 patent and U.S. 9,610,265 (“the ‘265 patent”). In both instances, a protective suit was filed in the U.S. District Court for the Eastern District of Pennsylvania to protect the 30-month stay against any venue challenge in Delaware. In July 2017, B. Braun filed motions to dismiss both actions in Delaware due to improper venue basedunder its ANDA on the recent U.S. Supreme Court TC Heartland decision on venue in patent cases, and also filed a separate motion to dismiss in the original action in Pennsylvania. Following receipt of a third Paragraph IV notice letter from B. Braun on July 13, 2017 that included a certification to the ‘265 patent, amended complaints were filed in July 2017 in the U.S. District Courts for the Districts of Delaware and Eastern District of Pennsylvania by Mallinckrodt Hospital Products Inc., Mallinckrodt IP and Pharmatop.  Also in July 2017, Mallinckrodt Hospital Products Inc., Mallinckrodt IP and Pharmatop filed a motion to stay the action in the Eastern District of Pennsylvania. A hearing occurred August 24, 2017 in the U.S. District Court for the District of Delaware regarding B. Braun’s motion to dismiss the Delaware actions for improper venue. A decision has not been rendered. A scheduling conference occurred October 4, 2017 in the U.S. District Court for the Eastern District of Pennsylvania and no decisions were rendered on any of the pending motions. A hearing on these pending motions has been scheduled foror after December 29, 2017.6, 2020, or earlier under certain circumstances.







Ofirmev Patent Litigation: Agila Specialties Private Limited,InnoPharma Licensing LLC and InnoPharma, Inc. (now Mylan Laboratories Ltd.) and Agila SpecialtiesIn September 2014, Cadence Pharmaceuticals, Inc. (a Mylan Inc. Company), (collectively “Agila”("Cadence").  In December 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, and Pharmatop, the then owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against InnoPharma Licensing LLC and InnoPharma, Inc. (both are subsidiaries of Pfizer and collectively "InnoPharma") alleging that InnoPharma infringed U.S. Patent Nos. 6,028,222 ("the '222 patent") and 6,992,218 ("the '218 patent"). Separately, on December 1, 2016 Mallinckrodt IP Filed suit in the U.S. District Court for the District of Delaware against InnoPharma alleging that InnoPharma infringed the '012 patent. On May 4, 2017 the parties entered into settlement agreements on both suits under which InnoPharma was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: Agila Specialties Private Limited, Inc. (now Mylan Laboratories Ltd.) and Agila Specialties Inc. (a Mylan Inc. Group), (collectively "Agila").  In December 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, and Pharmatop filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed U.S. Patent No. 6,028,222 ("the '222") patent'222 and the '218 patent 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.patents. Separately, on December 1, 2016 Mallinckrodt IP filed suit in the U.S. District Court for the District of Delaware against Agila alleging that Agila infringed the ‘012'012 patent. On December 31, 2016, the parties entered into settlement agreements on both suits under which Agila was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
Ofirmev Patent Litigation: InnoPharma Licensing LLC and InnoPharma, Inc. In September 2014, Cadence and Mallinckrodt IP, subsidiaries of the Company, and Pharmatop, the owner of the two U.S. patents licensed exclusively by the Company, filed suit in the U.S. District Court for the District of Delaware against InnoPharma Licensing LLC and InnoPharma, Inc. (both are subsidiaries of Pfizer and collectively "InnoPharma") alleging that InnoPharma infringed the '222 patent and the '218 patent following receipt of an August 2014 notice from InnoPharma concerning its submission of a NDA, containing a Paragraph IV patent certification with the FDA for a competing version of Ofirmev. Separately, on December 1, 2016 Mallinckrodt IP filed suit in the U.S. District Court for the District of Delaware against InnoPharma alleging that InnoPharma infringed the ‘012 patent. On May 4, 2017, the parties entered into settlement agreements on both suits under which InnoPharma was granted the non-exclusive right to market a competing intravenous acetaminophen product in the U.S. under its NDA on or after December 6, 2020, or earlier under certain circumstances.
The Company has successfully asserted the ‘222'222 and ‘218'218 patents and maintained their validity in both litigation and proceedings at the USPTO. The Company will continue to vigorously enforce its intellectual property rights relating to Ofirmev to prevent the marketing of infringing generic or competing products prior to December 6, 2020, which, if unsuccessful, 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.
Tyco Healthcare Group LP, et al. v. Mutual Pharmaceutical Company,Group, 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 ANDA to the FDA seeking to sell a generic version of the Company's 7.5 mg RESTORIL™ sleep aid product. Mutual also filed antitrust and unfair competition counterclaims. The patents at issue have since expired or been found invalid. The trial court issued an opinion and order granting the Company's motion for summary judgment regarding Mutual's antitrust and unfair competition counterclaims. Mutual appealed this decision to the U.S. Court of Appeals for the Federal Circuit and the Federal Circuit issued a split decision, affirming the trial court in part and remanding to the trial court certain counterclaims for further proceedings. The Company filed a motion for summary judgment with the U.S. District Court regarding the remanded issues. In May 2015, the trial court issued an opinion granting-in-part and denying-in-part the Company’s motion for summary judgment. In March 2017, the parties entered into a settlement agreement regarding the antitrust and unfair competition counterclaims and the case was dismissed.

Jazz Pharmaceuticals, Inc. and Jazz Pharmaceuticals Ireland v. Mallinckrodt PLC, Mallinckrodt Inc. and Mallinckrodt LLC. In January 2018, Jazz Pharmaceuticals, Inc. and Jazz Pharmaceuticals Ireland (collectively, "Jazz") filed suit in the U.S. District Court for the District of New Jersey against the Company alleging that the Company infringed U.S. Patent Nos. 7,668,730, 7,765,106, 7,765,107, 7,895,059, 8,457,988, 8,589,182, 8,731,963, 8,772,306, 9,050,302, and 9,486,426 following receipt of a November 2017 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Xyrem. On June 4, 2018, the parties entered into a settlement agreement under which the Company was granted the non-exclusive right to market a competing sodium oxybate product in the U.S. under its ANDA on or after December 31, 2025, or earlier under certain circumstances.
Shire Development LLC, Shire LLC and Shire US, Inc. v. SpecGx LLC. In May 2018, Shire Development LLC, Shire LLC and Shire US, Inc. (collectively “Shire”) filed suit in the U.S. District Court for the District of Delaware against the Company alleging that the Company infringed U.S. Patent Nos. 6,913,768, 8,846,100, and 9,173,857 following receipt of an April 2018 notice from the Company concerning its submission of an ANDA, containing a Paragraph IV patent certification with the FDA for a competing version of Mydayis. The Company intends to vigorously defend its position.

Commercial and Securities Litigation
Grifols. On March 13, 2018, Grifols initiated arbitration against the Company, alleging breach of a Manufacturing and Supply Agreement entered into between the Company's predecessor-in-interest, Cadence Pharmaceuticals Inc., and Grifols. Mallinckrodt intends to vigorously defend itself in this matter.
Putative Class Action Litigation (MSP). On October 30, 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation ("UBC") in the U.S. District Court for the Central District of California. The case is captioned MSP Recovery Claims, Series II LLC, et al. v. Mallinckrodt ARD, Inc., et al. The complaint purports to be brought on behalf of two classes: all Medicare Advantage Organizations and related entities in the U.S. who purchased or provided reimbursement for H.P. Acthar Gel pursuant to (i) Medicare Part C contracts (Class 1) and (ii) Medicare Part D contracts (Class 2) since January 1, 2011, with certain exclusions. The complaint alleges that the Company engaged in anticompetitive, unfair, and deceptive acts to artificially raise and maintain the price of Acthar.H.P. Acthar Gel. To this end, the complaint alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen Depot and reaching anti-competitive agreements with the other defendants by selling H.P. Acthar Gel through an exclusive distribution network. The complaint purports to allege claims under federal and state antitrust laws and state unfair competition and unfair trade practice laws. Pursuant to a motion filed by defendants,



this case has been transferred to the U.S. District Court for the Northern District of Illinois. The Company intends to vigorously defend itself in this matter.
Putative Class Action Litigation. On April 6, 2017, a putative class action lawsuit was filed against the Company and UBC in the U.S. District Court for the Northern District of Illinois. The case is captioned City of Rockford v. Mallinckrodt ARD, Inc., et al. The complaint was subsequently amended, most recently on December 8, 2017, to include an additional named plaintiff and additional defendants. As amended, the complaint purports to be brought on behalf of all self-funded entities in the U.S. and its Territories, excluding any Medicare Advantage Organizations, related entities and certain others, that paid for H.P. Acthar Gel from August 2007 to the present. The lawsuit alleges that the Company engaged in anticompetitive, unfair, and deceptive acts to artificially raise and maintain the price of H.P. Acthar Gel. To this end, the suit alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen Depot; conspired with UBC and violated anti-racketeering laws by selling H.P. Acthar Gel through an exclusive distributor; and committed fraud on consumers by failing to correctly identify H.P. Acthar Gel's active ingredient on package inserts. The Company intends to vigorously defend itself in this matter.
Employee Stock Purchase Plan Securities Litigation. On July 20, 2017, a purported purchaser of Mallinckrodt stock through Mallinckrodt’sMallinckrodt's Employee Stock Purchase Plans (“ESPPs”("ESPPs"), filed a derivative and class action lawsuit in the Federal District Court in the Eastern District of Missouri, captioned Solomon v. Mallinckrodt plc, et al., against the Company, its Chief Executive Officer Mark C. Trudeau ("CEO"), its Chief Financial Officer Matthew K. Harbaugh ("CFO"), its Controller Kathleen A. Schaefer, and current and former directors of the Company. TheOn September 6, 2017, plaintiff voluntarily dismissed its complaint in the Federal District Court for the Eastern District of Missouri complaint and refiled itvirtually the same complaint in the U.S. District Court for the District of Columbia. The complaint purports to be brought on behalf of all persons who purchased or otherwise acquired Mallinckrodt stock between November 25, 2014, and January 18, 2017, inthrough the ESPPs. In the alternative, the plaintiff alleges a class action for those same purchasers/acquirers of stock in the ESPPs during the same period. The complaint asserts claims under Section


11 of the Securities Act, and for breach of fiduciary duty, misrepresentation, non-disclosure, mismanagement of the ESPPs’ESPPs' assets and breach of contract arising from substantially similar allegations as those contained in the putative class action securities litigation filed on January 23, 2017 and described below. There are two competing movants to serve as lead plaintiff/lead counsel, and those motions remain pending. The Company intends to vigorously defend itself in this matter.
Putative Class Action Litigation (Rockford). On April 6, 2017, a putative class action lawsuit was filed against the Company and United BioSource Corporation ("UBC") in the U.S. District Court forfollowing paragraph. Stipulated co-lead plaintiffs were approved by the Northern District of Illinois. The case is captioned City of Rockford v. Mallinckrodt ARD, Inc., et al. The complaint purports to be broughtcourt on behalf of all self-funded entities in the U.S. and its Territories that paid for Acthar from August 2007 to the present. AnMarch 1, 2018. Co-Lead Plaintiffs filed an amended complaint on June 4, 2018 having a class period of July 14, 2014 to November 6, 2017. On July 6, 2018, this matter was filed on October 9, 2017, adding defendants and alleging thatstayed by agreement of the Company engaged in anticompetitive, fraudulent, and deceptive acts to artificially raise and maintainparties pending resolution of the price of Acthar. To this end, the amended complaint alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen Depot; conspired with the other defendants and violated anti-racketeering laws by selling Acthar through an exclusive distribution network; and committed a fraud on consumers by misrepresenting the value of Acthar. The Company intends to vigorously defend itself in this matter.Shenk matter below.
Putative Class Action Securities Litigation. On January 23, 2017, a putative class action lawsuit was filed against the Company and its CEO in the U.S. District Court for the District of Columbia, captioned Patricia A. Shenk v. Mallinckrodt plc, et al. The complaint purports to be brought on behalf of all persons who purchased Mallinckrodt’sMallinckrodt's publicly traded securities on a domestic exchange between November 25, 2014 and January 18, 2017. The lawsuit generally alleges that the Company made false or misleading statements related to H.P. Acthar Gel and Synacthen to artificially inflate the price of the Company’sCompany's stock. In particular, the complaint alleges a failure by the Company to provide accurate disclosures concerning the long-term sustainability of H.P. Acthar Gel revenues, and the exposure of H.P. Acthar Gel to Medicare and Medicaid reimbursement rates. On January 26, 2017, a second putative class action lawsuit, captioned Jyotindra Patel v. Mallinckrodt plc, et al. was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Patel complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Shenk lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 13, 2017, a third putative class action lawsuit, captioned Amy T. Schwartz, et al., v. Mallinckrodt plc, et al., was filed against the same defendants named in the Shenk lawsuit in the U.S. District Court for the District of Columbia. The Schwartz complaint purports to be brought on behalf of shareholders who purchased shares of the Company between July 14, 2014 and January 18, 2017 and asserts claims similar to those set forth in the Shenk lawsuit. On March 23, 2017, a fourth putative class action lawsuit, captioned Fulton County Employees’Employees' Retirement System v. Mallinckrodt plc, et al., was filed against the Company and its CEO and CFO in the U.S. District Court for the District of Columbia. The Fulton County complaint purports to be brought on behalf of shareholders during the same period of time as that set forth in the Schwartz lawsuit and asserts claims similar to those set forth in the Shenk lawsuit. On March 27, 2017, four separate plaintiff groups moved to consolidate the pending cases and to be appointed as lead plaintiffs in the consolidated case. Since that time, two of the plaintiff groups have withdrawn their motions. There are two competing movantsLead plaintiff was designated by the court on March 9, 2018. Lead Plaintiff filed a consolidated complaint on May 18, 2018, alleging a class period from July 14, 2014 to serveNovember 6, 2017, the Company, its CEO, its CFO, and Executive Vice President, Hugh O'Neill, as lead plaintiff/lead counsel,defendants, and those motions remain pending.containing similar claims, but further alleging misstatements regarding payer reimbursement restrictions for H.P. Acthar Gel. On August 30, 2018, Lead Plaintiff voluntarily dismissed the claims against Mr. O'Neill without prejudice. The Company intends to vigorously defend itself in this matter.
Retrophin Litigation. In January 2014, Retrophin, Inc. ("Retrophin") filed a lawsuit against Questcor in the U.S. District Court for the Central District of California, alleging a variety of federal and state antitrust violations based on Questcor's acquisition from Novartis of certain rights to develop, market, manufacture, distribute, sell and commercialize Synacthen. In June 2015, the parties entered into a binding settlement agreement, under the terms of which Retrophin agreed to dismiss the litigation with prejudice and Questcor agreed to make a one-time cash payment to Retrophin in the amount of $15.5 million.
Putative Class Action Securities Litigation. In September 2012, a putative class action lawsuit was filed against Questcor and certain of its officers and directors in the U.S. District Court for the Central District of California, captioned John K. Norton v. Questcor Pharmaceuticals, et al. The complaint purported to be brought on behalf of shareholders who purchased Questcor common stock between April 26, 2011 and September 21, 2012. The complaint generally alleged 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 asserted 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 sought damages in an unspecified amount and equitable relief against the defendants. This lawsuit was consolidated with four subsequently-filed actions asserting similar claims under the caption: In re Questcor Securities Litigation. In October 2013, the District Court granted in part and denied in part Questcor's motion to dismiss the consolidated amended complaint. In October 2013, Questcor filed an answer to the consolidated amended complaint and fact discovery was concluded in January 2015. In April 2015, the parties 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 entered into the settlement to eliminate the uncertainties, burden and expense of further protracted litigation. During fiscal 2015, the Company established a $38.0 million reserve for this settlement, which was subsequently paid to a settlement fund. The court issued its final approval of the settlement on September 18, 2015.


Glenridge Litigation. In June 2011, Glenridge Pharmaceuticals, LLC ("Glenridge"), filed a lawsuit against Questcor in the Superior Court of California, Santa Clara County, alleging that Questcor had underpaid royalties to Glenridge under a royalty agreement related to net sales of Acthar. In August 2012, Questcor filed a separate lawsuit against the three principals of Glenridge, as well as Glenridge, challenging the enforceability of the royalty agreement. In August 2013, the lawsuits were consolidated into one case in the Superior Court of California, Santa Clara County. In October 2014, the parties entered into a binding term sheet settling the lawsuit. Under the terms of the settlement, the royalty rate payable by Questcor was reduced, royalties were capped instead of being payable for so long as Acthar was sold and Questcor agreed to pay Glenridge a reduced amount in satisfaction of royalties Questcor had previously accrued but not paid during the course of the lawsuit. In February 2015, the settlement agreement was finalized, with terms consistent with the October 2014 term sheet.


Pricing Litigation
State of Utah v. Apotex Corp., et al. The Company, along with several other pharmaceutical companies, was a defendant in this matter which was filed in May 2008, in the Third Judicial Circuit of Salt Lake County, Utah. The State of Utah alleges,alleged, generally, that the defendants reported false pricing information in connection with certain drugs that arewere reimbursable under Utah Medicaid, resulting in overpayment by Utah Medicaid for those drugs, and is seekingsought monetary damages and attorneys' fees. The Company believes that it hashad meritorious defenses to these claims and vigorously defended against them. In December 2015, the parties entered into a



binding settlement agreement, under the terms of which the State of Utah agreed to dismiss the litigation with prejudice and the Company agreed to make a one-time cash payment to the State of Utah within the reserve established for this matter.


Environmental Remediation and Litigation Proceedings
The Company is involved in various stages of investigation and cleanup related to environmental remediation matters at a number of sites, including those described below. The ultimate cost of site cleanup and timing of future cash outlays is difficult to predict, given the uncertainties regarding the extent of the required cleanup, the interpretation of applicable laws and regulations and alternative cleanup methods. The Company concluded that, as of September 29, 2017,28, 2018, it was probable that it would incur remedial costs in the range of $37.8$26.7 million to $114.2$67.3 million. The Company also concluded that, as of September 29, 2017,28, 2018, the best estimate within this range was $75.5$52.2 million, of which $2.4 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 September 29, 2017.28, 2018. While it is not possible at this time to determine with certainty the ultimate outcome of these matters, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Coldwater Creek, Saint Louis County, Missouri. The Company is named as a defendant in numerous tort complaints with numerous plaintiffs pending in the U.S. District Court for the Eastern District of Missouri that were filed in or after February 2012. These cases allege personal injury for alleged exposure to radiological substances, including in Coldwater Creek in Missouri, and in the air. Plaintiffs allegedly lived and/or worked in various locations in Saint Louis County, Missouri, near Coldwater Creek. Radiological residues which may have been present in the creek have previously been remediated by the U.S. Army Corps of Engineers ("USACE"). The USACE continues to study and remediate the creek and surrounding areas. The Company believes that it hashad meritorious defenses to these complaints and is vigorously defendingdefended against them. The Company is unable to estimate a range of reasonably possible losses for the following reasons: (i) the proceedings are in intermediate stages; (ii) the Company has not received and reviewed complete information regarding the plaintiffs and their medical conditions; and (iii) there are significant factual and scientific issues to be resolved. Groups of bellwether plaintiffs have been selected by the court and discovery is ongoing. While itUpon further evaluation of the Company's potential exposure, this matter is not possible at this time to determine with certainty the ultimate outcome of this case, 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.no longer considered material.
Lower Passaic River, New Jersey. The Company and approximately 70 other companies originally comprised the Lower Passaic Cooperating Parties Group ("the CPG") and are parties to a May 2007 Administrative Order on Consent ("AOC") with the Environmental Protection Agency ("EPA") to perform a remedial investigation and feasibility study ("RI/FS") of the 17-mile stretch known as the Lower Passaic River 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 consideredcontained interim remedial options for the lower 8-miles of the river,River, in addition to a "no action" option. As an interim step related to the 2007 AOC, on June 18, 2012 the CPG voluntarily entered into an AOC 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.River. The EPA estimated the cost for the remediation alternatives ranged 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 installinghad 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 ofalternative remedial actions for the entire 17-mile stretch of the River to remedial actions consistent with the EPA's preferred approach for the lower 8-mile 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 ranged from $483.4 million to $2.7 billion. The Company recorded an additional accrual 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.
On November 20, 2015, the Company withdrew from the CPG, but remains liable for its obligations under the two above-referenced AOCs, as well as potential future liabilities.
On March 4, 2016, the EPA issued the Record of Decision ("ROD") for the lower 8 miles of the River. The EPA's selected remedy for this stretch of the River was a slight modification of the preferred approach it identified in the revised FFS issued in April 2014. The new discounted, estimated cost was $1.38 billion. By letter dated March 31,On October 5, 2016, the EPA notified the Company, and approximately 98 other parties, of the Company’s potential liability for the lower 8 miles of the River. The letter also announced the EPA's intent to seek to determine whether one company,that Occidental Chemicals Corporation ("OCC"), would voluntarily enter into an agreement to perform the remedial design for the remedy selected in the ROD. The letter stated that, after execution of such an agreement, EPA planned to begin negotiation of an agreement under which OCC and the other major PRPs would implement and/or pay for the EPA’s selected remedy for the lower 8 miles of the River. Finally, the letter announced EPA's intent to provide a separate notice to unspecified parties of the opportunity to discuss a cash out settlement for the lower 8 miles of the River at a later date. On October 5, 2016, EPA announced that OCC had entered into an agreement to develop the remedial design.
By letter dated March 30, 2017,On August 7, 2018, the EPA notifiedfinalized a buyout offer of $280,600 with the Company, limited to its former Lodi facility, and nineteen other PRPs of their eligibility to enter into a cash out settlement for the lower 8 miles of the River. In exchange for thethis settlement, the Company would receive, received, inter alia, a covenant not to sue and contribution protection. There is no reopener provision should costs exceed estimated amounts. TheDuring the three months ended September 28, 2018, the Company submittedreduced the executed settlement agreementaccrual associated with this matter by $11.8 million to EPA on July 26, 2017. The settlement will be announced in$26.2 million, which represents the Federal Register and be subjectCompany's estimate of its remaining liability related to public comment, after which EPA will determine whether to proceed with the settlement.River.
Despite the issuance of the revised FFS and ROD by the EPA, and the RI/FS by the CPG, and the cash out settlement by the EPA there are many uncertainties associated with the final agreed-upon remediation, potential future liabilities and the Company's allocable share of the remediation. Given those uncertainties, the amounts accrued may not be indicative of the amounts for which the Company may be ultimately responsible and will be refined as the remediation progresses.




Occidental Chemical Corp. v. 21st Century Fox America, Inc. The Company and approximately 120 other companies were named as defendants in a suit filed on June 30, 2018, by OCC. OCC seeks cost recovery and contribution for past and future costs in response to releases and threatened releases of hazardous substances into the Lower Passaic River ("the River"). The suit relates to the lower 8 miles of the River. A former Mallinckrodt facility located in Jersey City, NJ (located in Newark Bay) and the former Belleville facility were named in the suit. Due to an indemnification agreement with AVON Inc., Mallinckrodt has tendered the liability for the Jersey City site to AVON Inc. and they have accepted. The Company retains a share of the liability for this suit related to the Belleville facility. The approximately 120 other companies have formed a group to defend against the claims made in the suit. A motion to dismiss several of the claims has been submitted to the court.
Mallinckrodt Veterinary, Inc., Millsboro, Delaware. The Company previously operated a facility in Millsboro, Delaware ("the Millsboro Site") where various animal healthcare products were manufactured. 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, have assumed responsibility for the Millsboro Site cleanup under the Alternative Superfund Program administered by the EPA. The Company and another PRPcompanies 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. The Company, along with the other party, continues to conduct the studies and prepare remediation plans in accordance with the AOCs. In January 2017, the EPA issued its Action Memorandum regarding the EE/CA. The parties have negotiated a third AOC to implement the removal action. The AOC has been fully executed, with an effective date of August 8, 2017. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the ultimate resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.
Crab Orchard National Wildlife Refuge Superfund Site, near Marion, Illinois. 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 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 RI/FS for the AUS Operable Unit. General Dynamics negotiated an 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. General Dynamics has completed the RI and initiated the FS, and the PRPs have reached an agreement to enter into a non-binding mediation process, which has begun. While it is not possible at this time to determine with certainty the ultimate outcome of this matter, the Company believes, given the information currently available, that the final resolution of all known claims, after taking into account amounts already accrued, will not have a material adverse effect on its financial condition, results of operations and cash flows.


Products Liability Litigation
Beginning with lawsuits brought in July 1976, the Company is named as a defendant in personal injury lawsuits based on alleged exposure to asbestos-containing materials. A majority of the cases involve product liability claims based principally on allegations of past distribution of products containing asbestos. A limited number of the cases allege premises liability based on claims that individuals were exposed to asbestos while on the Company's property. Each case typically names dozens of corporate defendants in addition to the Company. The complaints generally seek monetary damages for personal injury or bodily injury resulting from alleged exposure to products containing asbestos. The Company's involvement in asbestos cases has been limited because it did not mine or produce asbestos. Furthermore, in the Company's experience, a large percentage of these claims have never been substantiated and have been dismissed by the courts. The Company has not suffered an adverse verdict in a trial court proceeding related to asbestos claims and intends to continue to vigorously defend itself in these matters. When appropriate, the Company settles claims; however, amounts paid to settle and defend all asbestos claims have been immaterial. As of September 29, 2017,28, 2018, there were approximately 11,50011,600 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 resolutions 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.

Industrial Revenue Bonds
Through September 29, 2017, the Company exchanged title to $16.0 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 capital leases expiring through 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 obligations and IRB assets 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 three months ended December 26, 2014. The installment sale transaction resulted in a taxable gain. In accordance with Internal Revenue Code Section 453A ("Section 453A") the gain is considered taxable in the period in which installment payments are received. During the three months ended December 25, 2015, the Company entered into similar transactions with certain intangible assets acquired in the acquisitions of Ikaria, Inc. and Therakos, Inc. During the three months ended March 31, 2017, the Company sold its Intrathecal Therapy business with a portion of the consideration from the sale being in the form of a note receivable subject to the installment sale provisions described above. As of September 29, 2017, the Company had an aggregate $1,606.7 million of interest-bearing U.S. deferred tax liabilities associated with outstanding installment notes. The GAAP calculation of interest associated with these deferred tax liabilities is subject to variable interest rates. The Company recognized interest expense associated with these deferred tax liabilities of $17.6 million and $17.4 million for the three months ended September 29, 2017 and September 30, 2016, respectively, and $53.9 million and $55.1 million for the nine months ended September 29, 2017 and September 30, 2016, respectively.
The Company has reported Section 453A interest on its tax returns on the basis of its interpretation of the U.S. Internal Revenue Code and Regulations. Alternative interpretations of these provisions could result in additional interest payable on the deferred tax liability. Due to the inherent uncertainty in these interpretations, the Company has deferred the recognition of the benefit associated with the Company’s interpretation and maintains a corresponding liability of $42.9 million and $30.3 million as of September 29,


2017 and December 30, 2016, respectively. The balance of this liability is expected to increase over future periods until such uncertainty is resolved. Favorable resolution of this uncertainty would likely result in a material reversal of this liability and a benefit being recorded to interest expense within the unaudited condensed consolidated statements of income.


Acquisition-Related Litigation
Several putative class actions were filed by purported holders of Questcor common stock in connection with the Company's acquisition of Questcor Acquisition in 2014 (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 named as defendants, and generally alleged 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 alleged 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 alleged, among other things, that the Company aided and abetted the purported breaches of fiduciary duty. The lawsuits sought 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 was reflected in a Memorandum of Understanding ("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 and re-executed the stipulation of settlement on May 7, 2015 (collectively the "Stipulation of Settlement").
The Stipulation of Settlement was subject to customary conditions, including court approval. On May 8, 2015, the California Court denied plaintiffs' Motion for Preliminary Approval of Settlement. On October 23, 2015, the parties submitted a proposed Stipulation and Order re Dismissal With Prejudice dismissing the action with prejudice as to each of the named plaintiffs and without prejudice as to the remainder of the class and, on October 30, 2015, the California Court entered that Order.


Interest-bearing Deferred Tax Obligation
As part of the integration of Questcor, the Company entered into an internal installment sale transaction related to certain H.P. Acthar Gel intangible assets during the three months ended December 26, 2014. The installment sale transaction resulted in a taxable gain. In accordance with Internal Revenue Code Section 453A ("Section 453A") the gain is considered taxable in the period in which installment payments are received. During the three months ended December 25, 2015, the Company entered into similar transactions with certain intangible assets acquired in the acquisitions of Ikaria, Inc. and Therakos, Inc.
During the three months ended March 31, 2017, the Company sold its Intrathecal Therapy business with a portion of the consideration from the sale being in the form of a note receivable subject to the installment sale provisions described above. During the three months ended March 30, 2018, the Company received payment on the note receivable and settled all installment sale provisions related to its sale of the Intrathecal Therapy business.
As of September 28, 2018, the Company had an aggregate $537.9 million of interest-bearing U.S. deferred tax liabilities associated with outstanding installment notes. The GAAP calculation of interest associated with these deferred tax liabilities is subject to variable interest rates. The Company recognized interest expense associated with these deferred tax liabilities of $6.4 million and $17.6 million for the three months ended September 28, 2018 and September 29, 2017, respectively, and $18.1 million and $53.9 million for the nine months ended September 28, 2018 and September 29, 2017, respectively.
The Company has reported Section 453A interest on its tax returns on the basis of its interpretation of the U.S. Internal Revenue Code and Regulations. Alternative interpretations of these provisions could result in additional interest payable on the deferred tax liability. Due to the inherent uncertainty in these interpretations, the Company has deferred the recognition of the benefit associated with the Company's interpretation and maintains a corresponding liability of $56.0 million and $46.0 million as of September 28, 2018 and December 29, 2017, respectively. The balance of this liability is expected to increase over future periods until such uncertainty is resolved. Favorable resolution of this uncertainty would likely result in a material reversal of this liability and a benefit being recorded to interest expense within the unaudited condensed consolidated statements of income.




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.


17.18.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:


September 28,
2018

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$35.3
 $24.5
 $10.8
 $
Equity securities
 
 
 
Foreign exchange forward and option contracts
 
 
 
 $35.3
 $24.5
 $10.8
 $

       
Liabilities:       
Deferred compensation liabilities$41.7
 $
 $41.7
 $
Contingent consideration and acquired contingent liabilities167.3
 
 
 167.3
Foreign exchange forward and option contracts0.1
 0.1
 
 

$209.1
 $0.1
 $41.7
 $167.3

 December 29,
2017
 
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$35.4
 $24.0
 $11.4
 $
Equity securities22.7
 22.7
 
 
Foreign exchange forward and option contracts0.1
 0.1
 
 
 $58.2
 $46.8
 $11.4
 $
        
Liabilities:       
Deferred compensation liabilities$42.7
 $
 $42.7
 $
Contingent consideration and acquired contingent liabilities246.4
 
 
 246.4
Foreign exchange forward and option contracts0.1
 0.1
 
 
 $289.2
 $0.1
 $42.7
 $246.4



September 29,
2017

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$34.1
 $23.2
 $10.9
 $
Equity securities21.6
 21.6
 
 
Foreign exchange forward and option contracts0.6
 0.6
 
 
 $56.3
 $45.4
 $10.9
 $

       
Liabilities:       
Deferred compensation liabilities$38.9
 $
 $38.9
 $
Contingent consideration and acquired contingent liabilities268.6
 
 
 268.6
Foreign exchange forward and option contracts1.2
 1.2
 
 

$308.7
 $1.2
 $38.9
 $268.6

 December 30,
2016
 
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$33.6
 $22.8
 $10.8
 $
Foreign exchange forward and option contracts0.7
 0.7
 
 
 $34.3
 $23.5
 $10.8
 $
        
Liabilities:       
Deferred compensation liabilities$32.5
 $
 $32.5
 $
Contingent consideration and acquired contingent liabilities250.5
 
 
 250.5
Foreign exchange forward and option contracts3.4
 3.4
 
 
 $286.4
 $3.4
 $32.5
 $250.5



Debt and equity securities held in rabbi trusts. Debt securities held in rabbi trusts primarily consist of U.S. government and agency securities and corporate bonds. When quoted prices are available in an active market, the investments are classified as level 1. When quoted market prices for a security are not available in an active market, they are classified as level 2. Equity securities held in rabbi trusts primarily consist of U.S. common stocks, which are valued using quoted market prices reported on nationally recognized securities exchanges.
Equity securities. Equity securities consist of shares in Mesoblast Limited, for which quoted prices are available in an active market; therefore, the investment is classified as level 1 and is valued based on quoted market prices reported on a nationally recognized securities exchange. During the nine months ended September 28, 2018, the Company's remaining shares were sold for gross proceeds of $25.5 million resulting in a $3.4 million gain being recognized within other income (expense), net within the unaudited condensed consolidated statement of income.
Foreign exchange forward and option contracts. Foreign currency option and forward contracts are used to economically manage the foreign exchange exposures of operations outside the U.S. Quoted prices are available in an active market; as such, these derivatives are classified as level 1.
Deferred compensation liabilities. The Company maintains a non-qualified deferred compensation plan in the U.S., which permits eligible employees of the Company to defer a portion of their compensation. A recordkeeping account is set up for each participant and the participant chooses from a variety of funds for the deemed investment of their accounts. The recordkeeping accounts generally correspond to the funds offered in the Company's U.S. tax-qualified defined contribution retirement plan and the account balance fluctuates with the investment returns on those funds.
Contingent consideration and acquired contingent liabilities. The Company maintains various contingent consideration and acquired contingent liabilities associated with the acquisitions of Questcor, Hemostasis products, Stratatech Corporation ("Stratatech"), and InfaCare.Ocera Therapeutics, Inc. ("Ocera").
The contingent liability associated with the acquisition of Questcor pertains to the Company's license agreement with Novartis AG and Novartis Pharma AG (collectively "Novartis") related to the development product MNK-1411. During the nine months ended September 29, 2017,28, 2018, the Company paid the required annual payment of $25.0 million related to the license of developmentaldevelopment product MNK-1411 from Novartis. The fair value of the remaining contingent payments was measured based on the net present value of a probability-weighted assessment. AtAs of September 29, 2017,28, 2018, the total remaining


payments under the license agreement shall not exceed $140.0$115.0 million. At September 29, 2017 and December 30, 2016, the fair value of the MNK-1411 contingent liability was $104.5 million and $124.7 million, respectively.
As part of the Hemostasis Acquisition, the Company provided contingent consideration to The Medicines Company in the form of sales-based milestones associated with Raplixa and PreveLeak, and acquired contingent liabilities associated with The Medicines Company's prior acquisitions of the aforementioned products. The Company determined the fair value of the contingent consideration and acquired contingent liabilities based on an option pricing modelassociated with the acquisition of Questcor to be $62.2$86.7 million and $11.6$111.8 million respectively, at September 29, 2017. The fair value of the contingent consideration and acquired contingent liabilities based on an option pricing model were $58.9 million and $11.2 million, respectively, as of September 28, 2018 and December 30, 2016.29, 2017, respectively.
As part of the acquisition of a development program from Stratatech Acquisition,in August 2016, the Company provided contingent consideration to the prior shareholders of Stratatech, primarily in the form of regulatory filing and approval milestones associated with the deep partial thickness and full thickness indications associated with the StrataGraft product.®. The Company assesses the likelihood of and timing of making such payments. The fair value of the contingent payments was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the contingent consideration associated with the acquisition of Stratatech Acquisition to be $55.3$56.9 million and $55.7$53.5 million atas of September 28, 2018 and December 29, 2017, and December 30, 2016, respectively.
As part of the acquisition of Ocera in December 2017, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones for MNK-6105 and MNK-6106 (previously referred to collectively as OCR-002), which represent the intravenous ("IV") and Oral formulations, respectively, and sales-based milestones associated with MNK-6105 and MNK-6106. The Company determined the fair value of the contingent consideration based on an option pricing model to be $23.7 million and $22.0 million as of September 28, 2018 and December 29, 2017, respectively.
Prior to September 28, 2018, the Company maintained various contingent consideration and acquired contingent liabilities associated with the acquisitions of three commercial stage topical hemostasis drugs from the Medicines Company ("the Hemostasis Acquisition") and InfaCare Pharmaceutical Corporation ("InfaCare").
As part of the Hemostasis Acquisition in February 2016, the Company provided contingent consideration to The Medicines Company in the form of sales based milestones associated with Raplixa and PreveLeak, and acquired contingent liabilities associated with The Medicines Company's prior acquisitions of the aforementioned products. The Company determined the fair value of the contingent consideration and acquired contingent liabilities based on an option pricing model to be $7.0 million and $17.1 million at December 29, 2017, respectively. The Company paid $12.0 million related to the FDA approval of PreveLeak during the three months ended March 30, 2018. On March 16, 2018, the Company sold a portion of the Hemostasis business, inclusive of the Recothrom and PreveLeak products to Baxter and the remaining contingent consideration liability balance of $12.1 million was transferred upon sale.
As part of the acquisition of InfaCare in September 2017, the Company provided contingent consideration to the prior shareholders of InfaCare in the form of both regulatory approval milestones for full-term and pre-term neonates for stannsoporfin and sales-based milestones associated with stannsoporfin. Due to recent developments and discussions with the FDA, as discussed



in further detail in Note 11, the timing of the development program is expected to shift outward. During the three and nine months ended September 28, 2018, the Company recognized a $7.0 million and $35.0 million fair value adjustment due to this shift in timing and its impact on the achievement of milestones per the purchase agreement. The Company determinedfair value of the contingent consideration is zero after the aforementioned adjustments as of September 28, 2018. The fair value of the contingent consideration based on an option pricing model was determined to be $35.0 million as of September 25,December 29, 2017.

Of the total fair value of the contingent consideration of $167.3 million, $52.8 million was classified as current and $114.5 million was classified as non-current in the unaudited condensed consolidated balance sheet as of September 28, 2018. The following table provides a summary ofsummarizes the changes in the Company'sfiscal 2018 activity for contingent consideration and acquired contingent liabilities:consideration:
Balance at December 29, 2017$246.4
Disposal of business(12.1)
Payments(37.0)
Accretion expense3.3
Fair value adjustments(33.3)
Balance at September 28, 2018$167.3

Balance at December 30, 2016$250.5
Acquisition date fair value of contingent consideration35.0
Payments(25.0)
Accretion expense4.0
Fair value adjustment4.1
Balance at September 29, 2017$268.6


Financial Instruments Not Measured at Fair Value
The following methods and assumptions were used by the Company in estimating fair values for financial instruments not measured at fair value as of September 29, 201728, 2018 and December 30, 2016:
The carrying amounts of cash and cash equivalents, accounts receivable, notes receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $18.2 million and $19.1 million as of September 29, 2017 and December 30, 2016, (level 1), respectively, which was included in prepaid expenses and other current assets and other assets on the unaudited condensed consolidated balance sheets.2017:
The carrying amounts of cash and cash equivalents, accounts receivable, notes receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $18.5 million and $18.3 million as of September 28, 2018 and December 29, 2017, (level 1), respectively, which was included in prepaid expenses and other current assets and other assets on the unaudited condensed consolidated balance sheets.
The Company received a portion of consideration foras part of contingent earn-out payments related to the sale of the IntrathecalNuclear Imaging business in the form of a note receivable. The fair value of the note receivable was equivalent to its carrying value of $154.0 million as of September 29, 2017 (level 1).
The Company entered into short-term investmentpreferred equity certificates during the threenine months ended December 30, 2016.September 28, 2018. These certificatessecurities are classified as held-to-maturity and are carried at amortized cost, which approximates fair value, of $1.6 million and $11.1$9.0 million at September 29, 2017 and December 30, 2016, respectively (level 2). These certificates are included in prepaid expenses and other current assets on the unaudited condensed consolidated balance sheets.
The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts28, 2018 (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $66.8 million and $67.6 million at September 29, 2017 and December 30, 2016, respectively. These contractssecurities are included in other assets on the unaudited condensed consolidated balance sheets.
The Company's life insurance contracts are carried at cash surrender value, which is based on the present value of future cash flows under the terms of the contracts (level 3). Significant assumptions used in determining the cash surrender value include the amount and timing of future cash flows, interest rates and mortality charges. The fair value of these contracts approximates the carrying value of $66.1 million and $67.0 million at September 28, 2018 and December 29, 2017, respectively. These contracts are included in other assets on the unaudited condensed consolidated balance sheets.
The carrying value of the Company's revolving credit facility and variable-rate receivable securitization approximates fair value due to the short-term nature of these instruments (level 1). The Company's 3.50%, 4.875%, 5.75%, 4.75%, 5.625%, and 5.50% notes are classified as level 1, as quoted prices are available in an active market for these notes. Since the quoted market prices for the Company's term loans and 9.50% and 8.00% debentures are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value. The fair value of the ACOA loan is based on the present value of future cash flows under the terms of the agreement (level 3) with future cash flows and interest rates as significant assumptions. The following table presents the carrying values and estimated fair values of the Company's debt, excluding capital leases, as of the end of each period:





The carrying value of the Company's revolving credit facility and variable-rate receivable securitization approximates fair value due to the short-term nature of these instruments. The carrying value of the 4.00% term loan approximates the fair value of the instrument, as calculated using the discounted exit price, which is therefore classified as level 3. Since the quoted market prices for the Company's term loans and 8.00% and 9.50% debentures are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value. The Company's 3.50%, 4.75%, 4.875%, 5.50%, 5.625% and 5.75% notes are classified as level 1, as quoted prices are available in an active market for these notes. The following table presents the carrying values and estimated fair values of the Company's long-term debt, excluding capital leases, as of the end of each period:

September 28, 2018
December 29, 2017

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
Level 1       
3.50% notes due April 2018$
 $
 $300.0
 $299.1
4.875% notes due April 2020700.0
 694.7
 700.0
 675.2
Variable-rate receivable securitization due July 2020225.0
 225.0
 200.0
 200.0
5.75% notes due August 2022884.0
 815.9
 884.0
 804.8
4.75% notes due April 2023500.2
 427.7
 526.5
 412.4
5.625% notes due October 2023731.4
 648.6
 738.0
 628.8
5.50% notes due April 2025692.1
 583.9
 692.1
 564.5
Revolving credit facility300.0
 300.0
 900.0
 900.0
Level 2       
9.50% debentures due May 202210.4
 11.0
 10.4
 10.9
8.00% debentures due March 20234.4
 4.5
 4.4
 4.4
Term loan due September 20241,613.8
 1,605.5
 1,851.2
 1,848.7
Term loan due February 2025597.0
 596.8
 
 
Level 3       
ACOA loan due December 20281.8
 1.8
 
 
Total debt$6,260.1
 $5,915.4
 $6,806.6
 $6,348.8


September 29, 2017
December 30, 2016

Carrying
Value

Fair
Value

Carrying
Value

Fair
Value
Variable-rate receivable securitization due July 2017$
 $
 $250.0
 $250.0
3.50% notes due April 2018300.0
 300.2
 300.0
 298.7
4.875% notes due April 2020700.0
 696.7
 700.0
 699.5
Variable-rate receivable securitization due July 2020200.0
 200.0
 
 
Term loans due March 2021
 
 1,948.5
 1,953.2
4.00% term loan due February 2022
 
 6.5
 6.5
9.50% debentures due May 202210.4
 11.5
 10.4
 12.0
5.75% notes due August 2022884.0
 853.3
 884.0
 850.3
8.00% debentures due March 20234.4
 4.7
 4.4
 4.9
4.75% notes due April 2023526.5
 448.5
 600.0
 520.9
5.625% notes due October 2023738.0
 689.5
 738.0
 682.4
Term loan due September 20241,855.7
 1,853.8
 
 
5.50% notes due April 2025692.1
 625.4
 695.0
 615.7
Revolving credit facility
 
 100.0
 100.0


Concentration of Credit and Other Risks
Financial instruments that potentially subject the Company to concentrations of credit risk primarily consist of accounts receivable. The Company does not typically require collateral from customers. A portion of the Company's accounts receivable outside the U.S. includes sales to government-owned or supported healthcare systems in several countries, which are subject to payment delays. Payment is dependent upon the financial stability and creditworthiness of those countries' national economies.
The following table shows net sales attributable to distributors that accounted for 10%10.0% or more of the Company's total net sales:

Three Months Ended Nine Months Ended

September 29,
2017

September 30,
2016
 September 29,
2017
 September 30,
2016
CuraScript, Inc.41% 40% 40% 37%
McKesson Corporation9% 11% 9% 11%
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
CuraScript, Inc.44.9% 55.2% 46.1% 55.7%
The following table shows accounts receivable attributable to distributors that accounted for 10%10.0% or more of the Company's gross accounts receivable at the end of each period:

September 29,
2017

December 30,
2016
McKesson Corporation20% 28%
Amerisource Bergen Corporation14% 15%
CuraScript, Inc.14%
15%
Cardinal Health, Inc.11%
10%


 September 28,
2018
 December 29,
2017
CuraScript, Inc.30.8% 33.8%
The following table shows net sales attributable to products that accounted for 10%10.0% or more of the Company's total net sales:

Three Months Ended Nine Months Ended

September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
H.P. Acthar Gel45.3% 51.4% 44.8% 51.1%
Inomax20.8% 20.9% 21.9% 21.6%
Ofirmev13.6% 12.6% 13.8% 12.8%


Three Months Ended Nine Months Ended

September 29,
2017

September 30,
2016
 September 29,
2017
 September 30,
2016
Acthar39% 37% 37% 34%
Inomax16%
14% 16% 14%






18.19.Segment Data
The two reportable segmentsCompany's continuing operations are further described below:
limited to the results of operations from the Specialty Brands includes branded medicines; and
segment as the Specialty Generics includes specialty generic drugs, API and external manufacturing.
Disposal Group is reported as a discontinued operation. See Note 4 for further details on the Specialty Generics Disposal Group. Selected information byfor the reportable segment wasis as follows:

Three Months Ended Nine Months Ended

September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
Net sales:       
Specialty Brands$640.0
 $600.6
 $1,844.3
 $1,760.7
Operating income:       
Specialty Brands$287.8
 $314.8
 $794.0
 $851.8
Unallocated amounts:       
Corporate and unallocated expenses (1)          
(28.0) (45.8) (81.9) (95.0)
Intangible asset amortization(184.2) (169.3) (544.8) (508.4)
Restructuring and related charges, net (2)
(19.6) (16.1) (101.4) (28.4)
Operating income$56.0
 $83.6
 $65.9
 $220.0

Three Months Ended Nine Months Ended

September 29,
2017

September 30,
2016
 September 29,
2017
 September 30,
2016
Net sales:


    
Specialty Brands$591.4

$633.1
 $1,743.1
 $1,757.4
Specialty Generics189.1
 239.8
 643.7
 767.6
Net sales of reportable segments780.5

872.9
 2,386.8
 2,525.0
Other (1)
13.4

14.3
 42.5
 44.6
Net sales$793.9

$887.2
 $2,429.3
 $2,569.6
Operating income:


    
Specialty Brands$316.6

$334.1
 $865.7
 $897.1
Specialty Generics40.4
 63.9
 179.9
 260.9
Segment operating income357.0

398.0
 1,045.6
 1,158.0
Unallocated amounts:




    
Corporate and unallocated expenses (2)          
(47.6)
(65.7) (163.9) (125.2)
Intangible asset amortization(173.2)
(175.9) (523.0) (526.7)
Restructuring and related charges, net (3)
(15.5)
(8.7) (35.7) (34.0)
Non-restructuring impairment charges
 
 
 (16.9)
Operating income$120.7
 $147.7
 $323.0
 $455.2

(1)Represents net sales under an ongoing supply agreement with the acquirer of the CMDS business.
(2)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments.segment.
(3)(2)Includes restructuring-related accelerated depreciation.




Net sales by product family within the Company's reportable segments aresegment is as follows:
 Three Months Ended Nine Months Ended
 September 28,
2018
 September 29,
2017
 September 28,
2018
 September 29,
2017
H.P. Acthar Gel$290.1
 $308.7
 $827.1
 $899.9
Inomax133.2
 125.7
 404.0
 379.6
Ofirmev87.1
 75.4
 254.7
 224.5
Therakos60.0
 55.3
 174.2
 157.7
Amitiza (1)
48.2
 
 119.2
 
BioVectra13.9
 16.0
 35.7
 36.4
Other7.5
 19.5
 29.4
 62.6
Net sales$640.0
 $600.6
 $1,844.3
 $1,760.7

 Three Months Ended Nine Months Ended
 September 29,
2017
 September 30,
2016
 September 29,
2017
 September 30,
2016
Acthar$308.7
 $327.0
 $899.9
 $873.7
Inomax125.7
 126.9
 379.6
 363.5
Ofirmev75.4
 75.6
 224.5
 217.4
Therakos immunotherapy55.3
 54.5
 157.7
 157.2
Hemostasis products16.2
 17.2
 42.8
 42.5
Other10.1
 31.9
 38.6
 103.1
Specialty Brands591.4
 633.1
 1,743.1
 1,757.4
        
Hydrocodone (API) and hydrocodone-containing tablets10.0
 30.8
 63.3
 109.8
Oxycodone (API) and oxycodone-containing tablets13.4
 28.8
 60.6
 97.3
Methylphenidate ER14.3
 23.4
 58.2
 72.3
Other controlled substances103.9
 111.8
 319.0
 358.4
Other products47.5
 45.0
 142.6
 129.8
Specialty Generics189.1
 239.8
 643.7
 767.6
        
Other (1)
13.4
 14.3
 42.5
 44.6
Net sales$793.9
 $887.2
 $2,429.3
 $2,569.6
(1)Amitiza consists of both product net sales and royalties. Refer to Note 3 for further details on Amitiza's revenues.
(1)Represents net sales under an ongoing supply agreement with the acquirer of the CMDS business.


19.20.Condensed Consolidating Financial Statements
MIFSA, an indirectly 100%-owned subsidiary of Mallinckrodt plc, is the borrower under the 3.50% notes due April 2018, which were paid in full in April 2018, and the 4.75% notes due April 2023 (collectively, "the Notes"), which are fully and unconditionally guaranteed by Mallinckrodt plc. The following information provides the composition of the Company's comprehensive income, assets, liabilities, equity and cash flows by relevant group within the Company: Mallinckrodt plc as guarantor of the Notes, MIFSA as issuer of the Notes and the other subsidiaries. There are no subsidiary guarantees related to the Notes.
Set forth on the following pages are the condensed consolidating financial statements for the three and nine months ended September 29, 201728, 2018 and September 30, 2016,29, 2017, and as of September 29, 201728, 2018 and December 30, 2016.29, 2017. Eliminations represent adjustments to eliminate investments in subsidiaries and intercompany balances and transactions between or among Mallinckrodt plc, MIFSA and other subsidiaries. Condensed consolidating financial information for Mallinckrodt plc and MIFSA, on a standalone basis, has been presented using the equity method of accounting for subsidiaries.









MALLINCKRODT PLC
CONDENSED CONSOLIDATING BALANCE SHEET
As of September 29, 201728, 2018
(unaudited, in millions)


Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations ConsolidatedMallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Assets                  
Current Assets:                  
Cash and cash equivalents$0.7
 $37.6
 $333.5
 $
 $371.8
$0.3
 $151.3
 $139.1
 $
 $290.7
Accounts receivable, net
 
 464.3
 
 464.3

 
 349.6
 
 349.6
Inventories
 
 341.3
 
 341.3

 
 143.4
 
 143.4
Prepaid expenses and other current assets0.3
 0.2
 120.6
 
 121.1
3.3
 0.2
 114.2
 
 117.7
Notes receivable
 
 154.0
 
 154.0

 
 
 
 
Current assets held for sale
 
 
 
 

 
 1,136.8
 
 1,136.8
Intercompany receivables127.9
 246.8
 694.1
 (1,068.8) 
192.0
 52.2
 353.5
 (597.7) 
Total current assets128.9
 284.6
 2,107.8
 (1,068.8) 1,452.5
195.6
 203.7
 2,236.6
 (597.7) 2,038.2
Property, plant and equipment, net
 
 962.4
 
 962.4

 
 439.3
 
 439.3
Goodwill
 
 3,459.5
 
 3,459.5

 
 3,675.4
 
 3,675.4
Intangible assets, net
 
 8,545.9
 
 8,545.9

 
 8,585.2
 
 8,585.2
Investment in subsidiaries4,923.4
 21,531.2
 10,654.1
 (37,108.7) 
6,194.4
 29,157.0
 11,964.2
 (47,315.6) 
Intercompany loans receivable744.8
 
 4,710.0
 (5,454.8) 
504.0
 
 13,073.8
 (13,577.8) 
Other assets
 
 191.6
 
 191.6

 
 170.5
 
 170.5
Total Assets$5,797.1
 $21,815.8
 $30,631.3
 $(43,632.3) $14,611.9
$6,894.0
 $29,360.7
 $40,145.0
 $(61,491.1) $14,908.6
                  
Liabilities and Shareholders' Equity                  
Current Liabilities:                  
Current maturities of long-term debt$
 $318.0
 $0.2
 $
 $318.2
$
 $16.5
 $0.2
 $
 $16.7
Accounts payable
 
 104.9
 
 104.9
0.1
 0.1
 76.4
 
 76.6
Accrued payroll and payroll-related costs
 
 84.4
 
 84.4

 
 89.0
 
 89.0
Accrued interest
 77.5
 0.6
 
 78.1

 76.2
 0.8
 
 77.0
Income taxes payable
 
 28.1
 
 28.1

 
 43.4
 
 43.4
Accrued and other current liabilities1.3
 0.4
 438.7
 
 440.4
1.6
 0.4
 435.5
 
 437.5
Current liabilities held for sale
 
 
 
 

 
 182.4
 
 182.4
Intercompany payables682.8
 
 386.0
 (1,068.8) 
288.7
 19.4
 289.6
 (597.7) 
Total current liabilities684.1
 395.9
 1,042.9
 (1,068.8) 1,054.1
290.4
 112.6
 1,117.3
 (597.7) 922.6
Long-term debt
 5,303.3
 214.1
 
 5,517.4

 3,698.3
 2,475.7
 
 6,174.0
Pension and postretirement benefits
 
 67.5
 
 67.5

 
 65.2
 
 65.2
Environmental liabilities
 
 73.1
 
 73.1

 
 49.8
 
 49.8
Deferred income taxes
 
 2,294.1
 
 2,294.1

 
 668.9
 
 668.9
Other income tax liabilities
 
 78.5
 
 78.5

 
 127.6
 
 127.6
Intercompany loans payable
 5,454.8
 
 (5,454.8) 

 13,577.8
 
 (13,577.8) 
Other liabilities
 7.7
 406.5
 
 414.2

 7.8
 289.1
 
 296.9
Total Liabilities684.1
 11,161.7
 4,176.7
 (6,523.6) 9,498.9
290.4
 17,396.5
 4,793.6
 (14,175.5) 8,305.0
Shareholders' Equity5,113.0
 10,654.1
 26,454.6
 (37,108.7) 5,113.0
6,603.6
 11,964.2
 35,351.4
 (47,315.6) 6,603.6
Total Liabilities and Shareholders' Equity$5,797.1
 $21,815.8
 $30,631.3
 $(43,632.3) $14,611.9
$6,894.0
 $29,360.7
 $40,145.0
 $(61,491.1) $14,908.6







MALLINCKRODT PLC
CONDENSED CONSOLIDATING BALANCE SHEET
As of December 30, 201629, 2017
(unaudited, in millions)


 Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Assets         
Current Assets:         
Cash and cash equivalents$0.7
 $908.8
 $351.4
 $
 $1,260.9
Accounts receivable, net
 
 275.4
 
 275.4
Inventories
 
 128.7
 
 128.7
Prepaid expenses and other current assets1.0
 0.2
 73.5
 
 74.7
Notes receivable
 
 154.0
 
 154.0
Current assets held for sale
 
 391.5
 
 391.5
Intercompany receivables70.0
 173.4
 831.4
 (1,074.8) 
Total current assets71.7
 1,082.4
��2,205.9
 (1,074.8) 2,285.2
Property, plant and equipment, net
 
 413.2
 
 413.2
Goodwill
 
 3,482.7
 
 3,482.7
Intangible assets, net
 
 8,261.0
 
 8,261.0
Long-term assets held for sale
 
 742.7
 
 742.7
Investment in subsidiaries6,551.6
 23,217.8
 12,356.2
 (42,125.6) 
Intercompany loans receivable593.1
 
 4,664.8
 (5,257.9) 
Other assets
 
 156.2
 
 156.2
Total Assets$7,216.4
 $24,300.2
 $32,282.7
 $(48,458.3) $15,341.0
          
Liabilities and Shareholders' Equity         
Current Liabilities:         
Current maturities of long-term debt$
 $313.5
 $0.2
 $
 $313.7
Accounts payable0.1
 
 77.2
 
 77.3
Accrued payroll and payroll-related costs
 
 78.4
 
 78.4
Accrued interest
 53.0
 4.0
 
 57.0
Income taxes payable
 
 15.5
 
 15.5
Accrued and other current liabilities0.8
 0.4
 367.3
 
 368.5
Current liabilities held for sale
 
 140.0
 
 140.0
Intercompany payables693.5
 104.6
 276.7
 (1,074.8) 
Total current liabilities694.4
 471.5
 959.3
 (1,074.8) 1,050.4
Long-term debt
 6,206.8
 214.1
 
 6,420.9
Pension and postretirement benefits
 
 67.1
 
 67.1
Environmental liabilities
 
 62.8
 
 62.8
Deferred income taxes
 
 749.1
 
 749.1
Other income tax liabilities
 
 94.1
 
 94.1
Long-term liabilities held for sale
 
 22.6
 
 22.6
Intercompany loans payable
 5,257.9
 
 (5,257.9) 
Other liabilities
 7.8
 344.2
 
 352.0
Total Liabilities694.4
 11,944.0
 2,513.3
 (6,332.7) 8,819.0
Shareholders' Equity6,522.0
 12,356.2
 29,769.4
 (42,125.6) 6,522.0
Total Liabilities and Shareholders' Equity$7,216.4
 $24,300.2
 $32,282.7
 $(48,458.3) $15,341.0








 Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Assets         
Current Assets:         
Cash and cash equivalents$0.5
 $44.5
 $297.0
 $
 $342.0
Accounts receivable, net
 
 431.0
 
 431.0
Inventories
 
 350.7
 
 350.7
Prepaid expenses and other current assets1.0
 
 130.9
 
 131.9
Notes receivable
 
 
 
 
Current assets held for sale
 
 310.9
 
 310.9
Intercompany receivables59.7
 65.1
 1,081.3
 (1,206.1) 
Total current assets61.2
 109.6
 2,601.8
 (1,206.1) 1,566.5
Property, plant and equipment, net
 
 881.5
 
 881.5
Goodwill
 
 3,498.1
 
 3,498.1
Intangible assets, net
 
 9,000.5
 
 9,000.5
Investment in subsidiaries5,534.1
 20,624.1
 10,988.5
 (37,146.7) 
Intercompany loans receivable3.5
 
 3,325.9
 (3,329.4) 
Other assets
 
 259.7
 
 259.7
Total Assets$5,598.8
 $20,733.7
 $30,556.0
 $(41,682.2) $15,206.3
          
Liabilities and Shareholders' Equity         
Current Liabilities:         
Current maturities of long-term debt$
 $19.7
 $251.5
 $
 $271.2
Accounts payable0.1
 0.1
 111.9
 
 112.1
Accrued payroll and payroll-related costs
 
 76.1
 
 76.1
Accrued interest
 53.9
 14.8
 
 68.7
Income taxes payable
 
 101.7
 
 101.7
Accrued and other current liabilities1.9
 7.5
 547.7
 
 557.1
Current liabilities held for sale
 
 120.3
 
 120.3
Intercompany payables612.5
 467.1
 126.5
 (1,206.1) 
Total current liabilities614.5
 548.3
 1,350.5
 (1,206.1) 1,307.2
Long-term debt
 5,860.6
 20.2
 
 5,880.8
Pension and postretirement benefits
 
 136.4
 
 136.4
Environmental liabilities
 
 73.0
 
 73.0
Deferred income taxes
 
 2,398.1
 
 2,398.1
Other income tax liabilities
 
 70.4
 
 70.4
Intercompany loans payable
 3,329.4
 
 (3,329.4) 
Other liabilities
 7.0
 349.1
 
 356.1
Total Liabilities614.5
 9,745.3
 4,397.7
 (4,535.5) 10,222.0
Shareholders' Equity4,984.3
 10,988.4
 26,158.3
 (37,146.7) 4,984.3
Total Liabilities and Shareholders' Equity$5,598.8
 $20,733.7
 $30,556.0
 $(41,682.2) $15,206.3




MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended September 29, 201728, 2018
(unaudited, in millions)


Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations ConsolidatedMallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Net sales$
 $
 $793.9
 $
 $793.9
$
 $
 $640.0
 $
 $640.0
Cost of sales0.9
 
 392.4
 
 393.3
0.7
 
 325.5
 
 326.2
Gross profit(0.9) 
 401.5
 
 400.6
Gross (loss) profit(0.7) 
 314.5
 
 313.8
Selling, general and administrative expenses13.4
 0.2
 192.1
 
 205.7
12.4
 0.1
 151.5
 
 164.0
Research and development expenses1.8
 
 57.7
 
 59.5
1.6
 
 76.9
 
 78.5
Restructuring charges, net
 
 14.3
 
 14.3

 
 14.7
 
 14.7
Non-restructuring impairment charges
 
 
 
 
Losses on divestiture and license
 
 0.4
 
 0.4
Losses on divestiture
 
 0.6
 
 0.6
Operating (loss) income(16.1) (0.2) 137.0
 
 120.7
(14.7) (0.1) 70.8
 
 56.0
                  
Interest expense(3.3) (90.9) (19.0) 20.6
 (92.6)(1.6) (112.0) (257.4) 277.4
 (93.6)
Interest income2.2
 0.4
 19.3
 (20.6) 1.3
2.4
 249.6
 27.4
 (277.4) 2.0
Other income, net1.4
 1.7
 0.6
 
 3.7
Other income (expense), net2.3
 (156.8) 167.9
 
 13.4
Intercompany fees(4.3) 
 4.3
 
 
(3.5) (0.1) 3.6
 
 
Equity in net income of subsidiaries82.4
 261.8
 174.7
 (518.9) 
127.8
 238.9
 221.9
 (588.6) 
Income from continuing operations before income taxes62.3
 172.8
 316.9
 (518.9) 33.1
Income (loss) from continuing operations before income taxes112.7
 219.5
 234.2
 (588.6) (22.2)
Income tax benefit(1.4) (2.1) (27.7) 
 (31.2)(1.1) (2.4) (121.7) 
 (125.2)
Income from continuing operations63.7
 174.9
 344.6
 (518.9) 64.3
113.8
 221.9
 355.9
 (588.6) 103.0
Loss from discontinued operations, net of income taxes
 (0.2) (0.4) 
 (0.6)
Income from discontinued operations, net of income taxes
 
 10.8
 
 10.8
Net income63.7
 174.7
 344.2
 (518.9) 63.7
113.8
 221.9
 366.7
 (588.6) 113.8
Other comprehensive loss, net of tax(5.1) (5.1) (10.5) 15.6
 (5.1)
Other comprehensive income, net of tax3.0
 3.0
 5.8
 (8.8) 3.0
Comprehensive income$58.6
 $169.6
 $333.7
 $(503.3) $58.6
$116.8
 $224.9
 $372.5
 $(597.4) $116.8






MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the three months ended September 30, 201629, 2017
(unaudited, in millions)


Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations ConsolidatedMallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Net sales$
 $
 $887.2
 $
 $887.2
$
 $
 $600.6
 $
 $600.6
Cost of sales
 
 397.0
 
 397.0
0.9
 
 267.1
 
 268.0
Gross profit
 
 490.2
 
 490.2
Gross (loss) profit(0.9) 
 333.5
 
 332.6
Selling, general and administrative expenses14.7
 0.1
 253.0
 
 267.8
13.4
 0.2
 172.7
 
 186.3
Research and development expenses
 
 67.9
 
 67.9
1.8
 
 45.1
 
 46.9
Restructuring charges, net
 
 6.8
 
 6.8

 
 15.4
 
 15.4
Non-restructuring impairment charge
 
 
 
 
Losses on divestiture and license
 
 
 
 
Losses on divestiture
 
 0.4
 
 0.4
Operating (loss) income(14.7) (0.1) 162.5
 
 147.7
(16.1) (0.2) 99.9
 
 83.6
                  
Interest expense(36.1) (82.0) (19.4) 43.5
 (94.0)(3.3) (90.9) (19.0) 20.6
 (92.6)
Interest income
 0.2
 43.8
 (43.5) 0.5
2.2
 0.4
 19.3
 (20.6) 1.3
Other income (expense), net7.4
 
 (8.0) 
 (0.6)1.4
 1.7
 (0.1) 
 3.0
Intercompany fees(5.6) 
 5.6
 
 
(4.3) 
 4.3
 
 
Equity in net income of subsidiaries157.1
 302.7
 224.5
 (684.3) 
82.4
 261.8
 174.7
 (518.9) 
Income from continuing operations before income taxes108.1
 220.8
 409.0
 (684.3) 53.6
Income (loss) from continuing operations before income taxes62.3
 172.8
 279.1
 (518.9) (4.7)
Income tax benefit(6.9) (4.1) (45.4) 
 (56.4)(1.4) (2.1) (54.3) 
 (57.8)
Income from continuing operations115.0
 224.9
 454.4
 (684.3) 110.0
63.7
 174.9
 333.4
 (518.9) 53.1
(Loss) income from discontinued operations, net of income taxes
 (0.4) 5.4
 
 5.0

 (0.2) 10.8
 
 10.6
Net income115.0
 224.5
 459.8
 (684.3) 115.0
63.7
 174.7
 344.2
 (518.9) 63.7
Other comprehensive loss, net of tax(19.9) (19.9) (39.8) 59.7
 (19.9)(5.1) (5.1) (10.5) 15.6
 (5.1)
Comprehensive income$95.1
 $204.6
 $420.0
 $(624.6) $95.1
$58.6
 $169.6
 $333.7
 $(503.3) $58.6

























































MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the nine months ended September 29, 201728, 2018
(unaudited, in millions)


Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations ConsolidatedMallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Net sales$
 $
 $2,429.3
 $
 $2,429.3
$
 $
 $1,844.3
 $
 $1,844.3
Cost of sales1.8
 
 1,192.2
 
 1,194.0
1.6
 
 935.1
 
 936.7
Gross profit(1.8) 
 1,237.1
 
 1,235.3
Gross (loss) profit(1.6) 
 909.2
 
 907.6
Selling, general and administrative expenses46.7
 0.6
 698.6
 
 745.9
30.1
 0.5
 490.1
 
 520.7
Research and development expenses3.6
 
 187.3
 
 190.9
3.8
 
 220.1
 
 223.9
Restructuring charges, net
 
 32.1
 
 32.1

 
 96.5
 
 96.5
Non-restructuring impairment charge
 
 
 
 
Gains on divestiture and license
 
 (56.6) 
 (56.6)
Operating income(52.1) (0.6) 375.7
 
 323.0
Losses on divestiture
 
 0.6
 
 0.6
Operating (loss) income(35.5) (0.5) 101.9
 
 65.9
                  
Interest expense(10.0) (264.9) (57.9) 53.8
 (279.0)(6.2) (323.2) (272.2) 321.5
 (280.1)
Interest income5.3
 1.0
 50.3
 (53.8) 2.8
6.8
 251.6
 69.7
 (321.5) 6.6
Other income (expense), net19.0
 (1.6) (11.2) 
 6.2
9.0
 (154.0) 162.5
 
 17.5
Intercompany fees(13.3) 
 13.3
 
 
(12.0) (0.1) 12.1
 
 
Equity in net income of subsidiaries572.1
 1,113.5
 848.1
 (2,533.7) 
145.9
 647.2
 425.4
 (1,218.5) 
Income from continuing operations before income taxes521.0
 847.4
 1,218.3
 (2,533.7) 53.0
Income (loss) from continuing operations before income taxes108.0
 421.0
 499.4
 (1,218.5) (190.1)
Income tax benefit(4.7) (2.6) (103.5) 
 (110.8)(3.4) (4.4) (214.2) 
 (222.0)
Income from continuing operations525.7
 850.0
 1,321.8
 (2,533.7) 163.8
111.4
 425.4
 713.6
 (1,218.5) 31.9
(Loss) income from discontinued operations, net of income taxes
 (1.9) 363.8
 
 361.9
Income from discontinued operations, net of income taxes
 
 79.5
 
 79.5
Net income525.7
 848.1
 1,685.6
 (2,533.7) 525.7
111.4
 425.4
 793.1
 (1,218.5) 111.4
Other comprehensive income, net of tax59.4
 59.4
 117.9
 (177.3) 59.4
Other comprehensive loss, net of tax(4.3) (4.3) (9.3) 13.6
 (4.3)
Comprehensive income$585.1
 $907.5
 $1,803.5
 $(2,711.0) $585.1
$107.1
 $421.1
 $783.8
 $(1,204.9) $107.1






























































MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF COMPREHENSIVE INCOME
For the nine months ended September 30, 201629, 2017
(unaudited, in millions)


 Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Net sales$
 $
 $1,760.7
 $
 $1,760.7
Cost of sales1.8
 
 806.5
 
 808.3
Gross (loss) profit(1.8) 
 954.2
 
 952.4
Selling, general and administrative expenses46.7
 0.6
 571.2
 
 618.5
Research and development expenses3.6
 
 140.6
 
 144.2
Restructuring charges, net
 
 26.3
 
 26.3
Gains on divestiture
 
 (56.6) 
 (56.6)
Operating (loss) income(52.1) (0.6) 272.7
 
 220.0
          
Interest expense(10.0) (264.9) (57.9) 53.8
 (279.0)
Interest income5.3
 1.0
 50.3
 (53.8) 2.8
Other income (expense), net19.0
 (1.6) (88.0) 
 (70.6)
Intercompany fees(13.3) 
 13.3
 
 
Equity in net income of subsidiaries572.1
 1,113.5
 848.1
 (2,533.7) 
Income (loss) from continuing operations before income taxes521.0
 847.4
 1,038.5
 (2,533.7) (126.8)
Income tax benefit(4.7) (2.6) (146.1) 
 (153.4)
Income from continuing operations525.7
 850.0
 1,184.6
 (2,533.7) 26.6
(Loss) income from discontinued operations, net of income taxes
 (1.9) 501.0
 
 499.1
Net income525.7
 848.1
 1,685.6
 (2,533.7) 525.7
Other comprehensive income, net of tax59.4
 59.4
 117.9
 (177.3) 59.4
Comprehensive income$585.1
 $907.5
 $1,803.5
 $(2,711.0) $585.1
































 Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Net sales$
 $
 $2,569.6
 $
 $2,569.6
Cost of sales
 
 1,165.5
 
 1,165.5
Gross profit
 
 1,404.1
 
 1,404.1
Selling, general and administrative expenses40.9
 0.5
 660.6
 
 702.0
Research and development expenses
 
 200.8
 
 200.8
Restructuring charges, net
 
 29.2
 
 29.2
Non-restructuring impairment charge
 
 16.9
 
 16.9
Gains on divestiture and license
 
 
 
 
Operating income(40.9) (0.5) 496.6
 
 455.2
          
Interest expense(162.3) (245.1) (61.4) 182.0
 (286.8)
Interest income
 0.5
 182.6
 (182.0) 1.1
Other income (expense), net22.3
 
 (24.9) 
 (2.6)
Intercompany fees(12.9) 0.1
 12.8
 
 
Equity in net income of subsidiaries609.8
 1,015.2
 786.2
 (2,411.2) 
Income from continuing operations before income taxes416.0
 770.2
 1,391.9
 (2,411.2) 166.9
Income tax benefit(16.6) (18.1) (183.6) 
 (218.3)
Income from continuing operations432.6
 788.3
 1,575.5
 (2,411.2) 385.2
(Loss) income from discontinued operations, net of income taxes
 (2.1) 49.5
 
 47.4
Net income432.6
 786.2
 1,625.0
 (2,411.2) 432.6
Other comprehensive loss, net of tax(20.3) (20.3) (41.0) 61.3
 (20.3)
Comprehensive income$412.3
 $765.9
 $1,584.0
 $(2,349.9) $412.3
































MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 29, 201728, 2018
(unaudited, in millions)


Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations ConsolidatedMallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Cash Flows From Operating Activities:                  
Net cash from operating activities$1,172.0
 $1,233.7
 $1,963.0
 $(3,920.2) $448.5
$447.6
 $43.0
 $1,420.5
 $(1,430.0) $481.1
Cash Flows From Investing Activities:                  
Capital expenditures
 
 (151.3) 
 (151.3)
 
 (93.3) 
 (93.3)
Acquisitions and intangibles, net of cash acquired
 
 (35.9) 
 (35.9)
Proceeds from divestiture of discontinued operations, net of cash
 
 576.9
 
 576.9
Acquisitions, net of cash acquired
 
 (699.9) 
 (699.9)
Proceeds from divestitures, net of cash
 
 313.2
 
 313.2
Intercompany loan investment, net(741.3) 
 (920.8) 1,662.1
 
(393.6) (85.2) (367.2) 846.0
 
Investment in subsidiary
 (1,412.5) 
 1,412.5
 

 (168.3) 
 168.3
 
Other
 
 0.5
 
 0.5

 
 28.8
 
 28.8
Net cash from investing activities(741.3) (1,412.5) (530.6) 3,074.6
 390.2
(393.6) (253.5) (818.4) 1,014.3
 (451.2)
Cash Flows From Financing Activities:                  
Issuance of external debt
 500.0
 40.0
 
 540.0

 600.0
 57.2
 
 657.2
Repayment of external debt and capital leases
 (759.9) (127.6) 
 (887.5)
Repayment of external debt and capital lease obligation
 (1,166.8) (396.6) 
 (1,563.4)
Debt financing costs
 (12.7) 
 
 (12.7)
 (12.0) 
 
 (12.0)
Proceeds from exercise of share options4.0
 
 
 
 4.0
1.0
 
 
 
 1.0
Repurchase of shares(437.7) 
 
 
 (437.7)(57.4) 
 
 
 (57.4)
Intercompany loan borrowings, net
 1,614.5
 47.6
 (1,662.1) 

 846.0
 
 (846.0) 
Intercompany dividends
 (1,170.0) (2,750.2) 3,920.2
 

 (814.2) (615.8) 1,430.0
 
Capital contribution
 
 1,412.5
 (1,412.5) 

 
 168.3
 (168.3) 
Other3.2
 
 (21.8) 
 (18.6)2.0
 
 (26.3) 
 (24.3)
Net cash from financing activities(430.5) 171.9
 (1,399.5) 845.6
 (812.5)(54.4) (547.0) (813.2) 415.7
 (998.9)
Effect of currency rate changes on cash
 
 2.7
 
 2.7

 
 (0.9) 
 (0.9)
Net change in cash, cash equivalents and restricted cash0.2
 (6.9) 35.6
 
 28.9
(0.4) (757.5) (212.0) 
 (969.9)
Cash, cash equivalents and restricted cash at beginning of period0.5
 44.5
 316.1
 
 361.1
0.7
 908.8
 369.6
 
 1,279.1
Cash, cash equivalents and restricted cash at end of period$0.7
 $37.6
 $351.7
 $
 $390.0
$0.3
 $151.3
 $157.6
 $
 $309.2
                  
Cash and cash equivalents at end of period$0.7
 $37.6
 $333.5
 $
 $371.8
$0.3
 $151.3
 $139.1
 $
 $290.7
Restricted Cash, current at end of period
 
 
 
 
Restricted Cash, noncurrent at end of period
 
 18.2
 
 18.2
Restricted Cash, included in other assets at end of period
 
 18.5
 
 18.5
Cash, cash equivalents and restricted cash at end of period$0.7
 $37.6
 $351.7
 $
 $390.0
$0.3
 $151.3
 $157.6
 $
 $309.2







MALLINCKRODT PLC
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
For the nine months ended September 30, 201629, 2017
(unaudited, in millions)


 Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Cash Flows From Operating Activities:         
Net cash from operating activities$1,172.0
 $1,233.7
 $1,963.0
 $(3,920.2) $448.5
Cash Flows From Investing Activities:         
Capital expenditures
 
 (151.3) 
 (151.3)
Acquisitions, net of cash acquired
 
 (35.9) 
 (35.9)
Proceeds from divestitures, net of cash
 
 576.9
 
 576.9
Intercompany loan investment, net(741.3) 
 (920.8) 1,662.1
 
Investment in subsidiary
 (1,412.5) 
 1,412.5
 
Other
 
 0.5
 
 0.5
Net cash from investing activities(741.3) (1,412.5) (530.6) 3,074.6
 390.2
Cash Flows From Financing Activities:         
Issuance of external debt
 500.0
 40.0
 
 540.0
Repayment of external debt and capital lease obligation
 (759.9) (127.6) 
 (887.5)
Debt financing costs
 (12.7) 
 
 (12.7)
Proceeds from exercise of share options4.0
 
 
 
 4.0
Repurchase of shares(437.7) 
 
 
 (437.7)
Intercompany loan borrowings, net
 1,614.5
 47.6
 (1,662.1) 
Intercompany dividends
 (1,170.0) (2,750.2) 3,920.2
 
Capital contribution
 
 1,412.5
 (1,412.5) 
Other3.2
 
 (21.8) 
 (18.6)
Net cash from financing activities(430.5) 171.9
 (1,399.5) 845.6
 (812.5)
Effect of currency rate changes on cash
 
 2.7
 
 2.7
Net change in cash, cash equivalents and restricted cash0.2
 (6.9) 35.6
 
 28.9
Cash, cash equivalents and restricted cash at beginning of period0.5
 44.5
 316.1
 
 361.1
Cash, cash equivalents and restricted cash at end of period$0.7
 $37.6
 $351.7
 $
 $390.0
          
Cash and cash equivalents at end of period$0.7
 $37.6
 $333.5
 $
 $371.8
Restricted Cash, included in other assets at end of period
 
 18.2
 
 18.2
Cash, cash equivalents and restricted cash at end of period$0.7
 $37.6
 $351.7
 $
 $390.0




 Mallinckrodt plc Mallinckrodt International Finance S.A. Other Subsidiaries Eliminations Consolidated
Cash Flows From Operating Activities:         
Net cash from operating activities$(21.3) $(99.3) $993.8
 $
 $873.2
Cash Flows From Investing Activities:         
Capital expenditures
 
 (133.9) 
 (133.9)
Acquisitions and intangibles, net of cash acquired
 
 (245.4) 
 (245.4)
Proceeds from divestiture of discontinued operations, net of cash
 (1.4) 4.4
 
 3.0
Intercompany loan investment, net
 (69.4) (1,587.5) 1,656.9
 
Investment in subsidiary
 (815.0) 
 815.0
 
Proceeds from sale of subsidiary3.4
 
 
 (3.4) 
Acquisition of subsidiary
 
 (3.4) 3.4
 
Other
 
 5.3
 
 5.3
Net cash from investing activities3.4
 (885.8) (1,960.5) 2,471.9
 (371.0)
Cash Flows From Financing Activities:         
Issuance of external debt
 
 36.3
 
 36.3
Repayment of external debt and capital leases
 (420.3) (18.7) 
 (439.0)
Debt financing costs
 
 
 
 
Proceeds from exercise of share options10.4
 
 
 
 10.4
Repurchase of shares(377.5) 
 
 
 (377.5)
Intercompany loan borrowings, net385.0
 1,271.9
 
 (1,656.9) 
Capital contribution
 
 815.0
 (815.0) 
Other
 
 (23.0) 
 (23.0)
Net cash from financing activities17.9
 851.6
 809.6
 (2,471.9) (792.8)
Effect of currency rate changes on cash
 
 1.8
 
 1.8
Net change in cash, cash equivalents and restricted cash
 (133.5) (155.3) 
 (288.8)
Cash, cash equivalents and restricted cash at beginning of period0.3
 158.5
 429.6
 
 588.4
Cash, cash equivalents and restricted cash at end of period$0.3
 $25.0
 $274.3
 $
 $299.6
          
Cash and cash equivalents at end of period$0.3
 $25.0
 $255.2
 $
 $280.5
Restricted Cash, current at end of period
 
 0.1
 
 0.1
Restricted Cash, noncurrent at end of period
 
 19.0
 
 19.0
Cash, cash equivalents and restricted cash at end of period$0.3
 $25.0
 $274.3
 $
 $299.6




20.21.Subsequent Events

Financing Activities
On October 22, 2018, the Company borrowed an additional $25.0 million on its receivable securitization, bringing total outstanding borrowings to $250.0 million for this instrument as of the date of this report.
On October 23, 2018, the Company made an $80.0 million payment on the revolving credit facility, bringing total outstanding borrowings to $220.0 million for this instrument as of the date of this report.

Commitments and Contingencies
Putative Class Action Litigation (MSP). On October 30, 2017, a putative class action lawsuit was filed againstCertain litigation matters occurred during the Company and United BioSource Corporation ("UBC") in the U.S. District Court for the Central District of California. The case is captioned MSP Recovery Claims, Series II LLC, et al. v. Mallinckrodt ARD, Inc., et al. The complaint purports to be brought on behalf of two classes: all Medicare Advantage Organizations and related entities in the U.S. who purchased or provided reimbursement for Acthar pursuant to (i) Medicare Part C contracts (Class 1) and (ii) Medicare Part D contracts (Class 2) since January 1, 2011, with certain exclusions. The complaint alleges that the Company engaged in anticompetitive, unfair, and deceptive acts to artificially raise and maintain the price of Acthar. To this end, the complaint alleges that the Company unlawfully maintained a monopoly in a purported ACTH product market by acquiring the U.S. rights to Synacthen Depot and reaching anti-competitive agreements with the other defendants by selling Acthar through an exclusive distribution network. The complaint purports to allege claims under federal and state antitrust laws and state unfair competition and unfair trade practice laws. The Company intends to vigorously defend itself in this matter.
Opioid Related Matters. The Company has been named in several lawsuits filed in federal court brought by various counties and cities, along with other opioid manufacturers and, often, distributors. In general, the lawsuits assert claims of public nuisance, negligence, civil conspiracy, fraud, violations of RICO or similar state laws, consumer fraud, deceptive trade practices, insurance fraud, unjust enrichment and other common law claims arising from defendants’ manufacturing, distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys’ fees and costs. These claims have been filed or amended to include the Company in the U.S. District Court for the Southern District of Illinois (October 26, 2017 and October 27, 2017), the U.S. District Court for the Southern District of Ohio (between September 22, 2017 and November 6, 2017), the U.S. District Court for the Northern District of Alabama (October 25, 2017), the U.S. District Court for the Eastern District of Michigan (October 12, 2017), and the U.S. District Courts for the Eastern and Western Districts of Kentucky (between October 3 and October 30, 2017). The Company intends to vigorously defend itself in these matters.

Inhaled Xenon Gas Licensing Agreement
On October 2, 2017, the Company entered into a licensing agreement ("the Licensing Agreement") for development and commercialization of NeuroproteXeon Inc.'s ("NeuroproteXeon") investigational, pharmaceutical-grade xenon gas for inhalation therapy being evaluated to improve survival and functional outcomes for patients resuscitated after a cardiac arrest. If approved, xenon gas for inhalation will expand the Company's portfolio of hospital drug-device combination products providing therapies for critically ill patients. The Company paid $10.0 million upfront with cash on hand to reimburse NeuroproteXeon for certain product development costs, and gained exclusive rights to commercialize the therapy, if approved, in the U.S., Canada, Japan and Australia. The Licensing Agreement includes additional payments of up to $25.0 million dependent on developmental, regulatory and sales milestones. In addition, NeuroproteXeon will receive tiered royalties on applicable worldwide net sales and a transfer price for commercial product supply. NeuroproteXeon will continue to be responsible for the cost of development and will manage the development of the product in collaboration with the Company.

Reorganization of Legal Entity Ownership
On October 6, 2017, the Company completed a reorganization of its legal entity ownership ("the Reorganization") to align with its ongoing transformation to become an innovation-driven specialty pharmaceuticals growth company. Many factors were considered in effecting the Reorganization, including streamlining treasury functions, simplifying legal entity reporting processes, and capital allocation efficiencies.
Given this Reorganization, the Internal Revenue Code required the Company to reallocate its tax basis from an investment in shares of a wholly-owned subsidiary to assets within another legal entity with no corresponding change in accounting basis. A deferred tax liability is not recognized on the wholly-owned subsidiary as there is a means for its recovery in a tax-free manner. The reallocation of tax basis resulted in a decrease to the net deferred tax liabilities associated with the assets within the other legal entity. During the three months ending December 29, 2017, the Company expects to record the reduction in its net deferred tax liabilities of $800.0 million to $950.0 million, which will result in the recognition of a net deferred income tax benefit of an equal amount. The reduction to net deferred tax liabilities is expected to be comprised of a $650.0 million to $775.0 million reduction to interest-bearing U.S. deferred tax liabilities and a $150.0 million to $175.0 million reduction to net deferred tax liabilities associated with intangible assets.
During the threenine months ended September 29, 2017,28, 2018 or prior, but had subsequent updates through the Company recognized income tax expenseissuance of $36.1 million, with an offset to deferred tax liabilities commensurate with the completion of certain aspects of the Reorganization during the third quarter of 2017.this report. See further discussion in Note 17.



Ocera Acquisition
On November 2, 2017, the Company entered into an agreement to acquire Ocera Therapeutics, Inc. ("Ocera") through a cash tender offer to purchase all of the outstanding shares of Ocera common stock for upfront consideration of approximately $42.0 million and contingent consideration up to $75.0 million based on the successful completion of certain development and sales milestones. Ocera is a clinical stage biopharmaceutical company focused on the development and commercialization of novel therapeutics for orphan and other serious liver diseases with a high unmet medical need. Ocera’s developmental product OCR-002, an ammonia scavenger, is being studied for treatment of hepatic encephalopathy, a neuropsychiatric syndrome associated with hyperammonemia, a complication of acute or chronic liver disease. This transaction is expected to close in the fourth quarter of 2017.

Goodwill and Other Long-Lived Assets Impairment Analysis
Goodwill is tested for impairment on an annual basis or more frequently if certain indicators are present or changes in circumstances suggest that impairment may exist. Management relies on a number of qualitative factors when considering a potential impairment such as its operating results, business plans, economic projections, anticipated future cash flows, transactions and market capitalization.
Subsequent to September 29, 2017, the Company's market capitalization has declined, which may be an indicator of impairment should this decrease be more than temporary. The Company will continue to assess the impact of its market capitalization. It is possible that if the Company's market capitalization decline is more than temporary, such decline could result in an impairment of goodwill and other long-lived assets associated with its reporting units.





Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016,December 29, 2017, filed with the United States ("U.S.") Securities and Exchange Commission ("the SEC") on November 29, 2016.February 27, 2018.
We own or have rights to use the trademarks and trade names that we use in conjunction with the operation of our business. One of the more important trademarks that we own or have rights to use that appears in this Quarterly Report on Form 10-Q is "Mallinckrodt," which is a registered trademark or the subject of pending trademark applications in the U.S. and other jurisdictions. Solely for convenience, we only use the ™ or ® symbols the first time any trademark or trade name is mentioned in the following discussion. Such references are not intended to indicate in any way that we will not assert, to the fullest extent permitted under applicable law, our rights to our trademarks and trade names. Each trademark or trade name of any other company appearing in the following discussion is, to our knowledge, owned by such other company.


Overview
We are a global business that develops, manufactures, markets and distributes specialty pharmaceutical products and therapies. Areas
On February 22, 2018, our Board of focus includeDirectors authorized commencement of a process to dispose of (1) our Specialty Generics business comprised of the previously reported Specialty Generics segment, with the exception of BioVectra, Inc. - our wholly-owned subsidiary that operates a contract manufacturing business in Canada ("BioVectra"), (2) certain of our non-promoted brands business, which was previously reflected in the Specialty Brands segment; and (3) our ongoing, post-divestiture supply agreement with the acquirer of the contrast media and delivery systems (CMDS) business, which was previously reflected in the Other non-operating segment (referred to collectively as the "Specialty Generics Disposal Group"). We evaluated the criteria prescribed by U.S. Generally Accepted Accounting Principles ("GAAP") for recording a disposal group as held for sale and discontinued operations. This criteria was met during the three months ended March 30, 2018, and as a result, prior year balances have been recast to present the financial results of the disposal group as a discontinued operation.
As the Specialty Generics Disposal Group is reported as a discontinued operation, our continuing operations are limited to the results of operations from the Specialty Brandssegment. Our Specialty Brands segment markets branded pharmaceutical products for autoimmune and rare diseases in the specialty areas likeof neurology, rheumatology, nephrology, pulmonologyophthalmology and ophthalmology;pulmonology; immunotherapy and neonatal respiratory critical care therapies; andtherapies, analgesics and hemostasisgastrointestinal products.
We operate our business in two reportable segments, which are further described below:
Specialty Brands includes branded medicines; Our diversified, in-line portfolio of both marketed and
Specialty Generics includes specialty generic drugs, active pharmaceutical ingredients ("API") and external manufacturing.
development products is focused on patients with significant unmet medical needs.
For further information on our business and products, refer to our Annual Report on Form 10-K for the fiscal year ended September 30, 2016,December 29, 2017, filed with the SEC on November 29, 2016.February 27, 2018.


Significant Events
Acquisitions and License Agreements


In October 2017, we entered into a licensing agreement (the "Licensing Agreement") for development and commercialization of NeuroproteXeon Inc.'s ("NeuroproteXeon") investigational, pharmaceutical-grade xenon gas for inhalation therapy being evaluated to improve survival and functional outcomes for patients resuscitated after a cardiac arrest. If approved, xenon gas for inhalation will expand our portfolio of hospital drug-device combination products providing therapies for critically ill patients. UnderOn February 13, 2018, the terms of the Licensing Agreement, we paid $10.0 million upfront with cash on hand to reimburse NeuroproteXeon for certain product development costs, and gained exclusive rights to commercialize the therapy, if approved, in the U.S., Canada, Japan and Australia.  The Licensing Agreement includes additional payments of up to $25.0 million dependent on developmental, regulatory and sales milestones. In addition, NeuroproteXeon will receive tiered royalties on applicable worldwide product sales and a transfer price for commercial product supply. NeuroproteXeon will continue to be responsible for the cost of development and will manage the development of the product in collaboration with us.
In September 2017, weCompany acquired InfaCare Pharmaceutical CorporationSucampo Pharmaceuticals, Inc. ("InfaCare"Sucampo") in a transaction valued at approximately $80.4 million, with additional payments of up to $345.0 million dependent on regulatory and sales milestones ("the InfaCare Acquisition"). InfaCare is focused on development and commercialization of proprietary pharmaceuticals for neonatal and pediatric patient populations. InfaCare's developmental product stannsoporfin, a heme oxygenase inhibitor, is under investigation for its potential to reduce the production of bilirubin, the elevation of which can contribute to serious consequences in infants. The acquisition was funded with cash on hand.
In August 2016, we acquired Stratatech Corporation ("Stratatech"), through the acquisition of all the outstanding common stock of Sucampo. Consideration for upfront considerationthe transaction consisted of $76.0 million and contingent milestone payments, which are primarily regulatory, and royalty obligations that could result in up to $121.0 millionapproximately $1.2 billion, including the assumption of additional considerationSucampo's third-party debt ("the StratatechSucampo Acquisition"). Stratatech is a regenerative medicine company focused on the development of unique, proprietary skin substitute products. Developmental products include StrataGraft® regenerative skin tissue and a technology platform for genetically enhanced skin tissues. The acquisition was funded withthrough the issuance of $600.0 million aggregate principal amount of senior secured notes (as discussed further below), a $900.0 million borrowing under our revolving credit facility and cash on hand.
In February 2016, Sucampo's commercialized products include Amitiza® (lubiprostone) ("Amitiza"), a leading global product in the branded constipation market, and Rescula® (unoprostone isopropyl ophthalmic solution) 0.15% ("Rescula"), which is indicated for ocular hypertension and open-angle glaucoma, and marketed solely in Japan. Through this acquisition, we acquired three commercial stage topical hemostasis drugs from The Medicines CompanyVTS-270, a Phase 3 development product for Niemann-Pick Type C, a rare, neurodegenerative, and ultimately fatal disease that can present at any age. Also acquired was an option to exercise a collaborative agreement with Cancer Prevention Pharmaceuticals ("CPP") associated with the development of CPP-1X/sulindac, a Phase 3 development product for Familial Adenomatous Polyposis ("FAP"). For more information on our ongoing development of CPP-1X/sulindac, refer to "Research and Development Investment" within this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.




Discontinued Operations and Divestitures
As previously mentioned, on February 22, 2018, our Board of Directors authorized commencement of a process to dispose of the Specialty Generics Disposal Group. Refer to Note 4 to the unaudited condensed consolidated financial statements for further information on the Specialty Generics Disposal Group.
On March 16, 2018, we completed the sale of a portion of our Hemostasis Acquisition"business, inclusive of our PreveLeak™ Surgical Sealant ("PreveLeak") - RECOTHROM®and Recothrom® Thrombin topical (Recombinant), PreveLeakTM Surgical Sealant, and RAPLIXATM (Fibrin Sealant (Human) ("Recothrom") -products to Baxter International, Inc. ("Baxter") for upfront considerationapproximately $185.0 million, with a base payment of $173.5$153.0 million, inclusive of existing inventory and subject to a closing inventory adjustment, with the remainder in potential future milestones. Baxter assumed other expenses, including contingent sales-based milestone payments that could result in up to $395.0 million of additional consideration. The acquisition was fundedliabilities associated with cash on hand.

Divestitures
On January 27, 2017, we completed the sale of our Nuclear Imaging business to IBA Molecular ("IBAM") for approximately $690.0 million before tax impacts, including up-front consideration of approximately $574.0 million, up to $77.0 million of contingent consideration and the assumption of certain liabilities.PreveLeak. We recorded a net of tax gainpre-tax loss on the sale of the Nuclear Imaging business of $361.7$0.6 million during the three and nine months ended September 29, 2017,28, 2018, which excluded any potential proceeds from the contingent considerationattainment of future milestones and reflectsreflected a chargepost-sale closing inventory adjustment of $0.6 million during the three months ended September 29, 2017 primarily as a result of ongoing working capital adjustments.$13.7 million. The financial results forassociated with the Nuclear Imaging business, including the recastoperations of prior year balances, are presented within discontinued operations.
On March 17, 2017, we completed the sale of our Intrathecal Therapy business to Piramal Enterprises Limited's subsidiary in the United Kingdom ("U.K."), Piramal Critical Care, for approximately $203.0 million, including fixed consideration of $171.0 millionPreveLeak and contingent consideration of up to $32.0 million. We recorded a pre-tax gain on the sale of the business of $56.6 million during the nine months ended September 29, 2017, which excluded any potential proceeds from the contingent consideration and reflects a post-sale adjustment of $0.4 million during the three months ended September 29, 2017. The financial results of the Intrathecal Therapy businessRecothrom are presented within continuing operations as this divestiture did not meet the criteria for discontinued operations classification.


Reorganization of Legal Entity OwnershipStannsoporfin
On October 6,May 3, 2018, in a joint meeting, the Federal Drug Administration's ("FDA") Gastrointestinal Drugs Advisory Committee and Pediatric Advisory Committee (the "Advisory Committee") recommended that the risk benefit profile of our stannsoporfin in-process research and development ("IPR&D") product does not support approval for the treatment of newborns ≥35 weeks of gestational age with indicators of hemolysis who are at risk of developing hyperbilirubinemia (severe jaundice). On August 9, 2018, we received a complete response letter from the FDA related to our new drug application ("NDA") for stannsoporfin, which provided guidance regarding areas of further evaluation for resubmitting the stannsoporfin NDA. While the timing of the development program has shifted outward, we continue to have conversations with the FDA to determine the best path forward. We will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated IPR&D asset of $113.5 million included within intangible assets, net on the unaudited condensed consolidated balance sheets as of September 28, 2018 and December 29, 2017.
As part of the acquisition of InfaCare Pharmaceutical Corporation ("InfaCare") in September 2017, we completed a reorganization of our legal entity ownership ("the Reorganization") to align with our ongoing transformation to become an innovation-driven specialty pharmaceuticals growth company. Many factors were considered in effecting the Reorganization, including streamlining treasury functions, simplifying legal entity reporting processes and capital allocation efficiencies.
Given this Reorganization, the Internal Revenue Code required us to reallocate our tax basis from an investment in shares of a wholly-owned subsidiary to assets within another legal entity with no corresponding change in accounting basis. A deferred tax liability is not recognized on the wholly-owned subsidiary as there is a means for its recovery in a tax-free manner. The reallocation of tax basis resulted in a decreaseprovided contingent consideration to the net deferred tax liabilitiesprior shareholders of InfaCare in the form of both regulatory approval milestones for full-term and pre-term neonates for stannsoporfin and sales-based milestones associated with stannsoporfin. Due to recent developments and discussions with the assets withinFDA, the other legal entity.timing of the development has shifted outward. During the three months ending December 29, 2017, we expect to record the reduction in our net deferred tax liabilities of $800.0 million to $950.0 million, which will result in the recognition of a net deferred income tax benefit of an equal amount. The reduction to net deferred tax liabilities is expected to be comprised of a $650.0 million to $775.0 million reduction to interest-bearing U.S. deferred tax liabilities and a $150.0 million to $175.0 million reduction to net deferred tax liabilities associated with intangible assets.


During the threenine months ended September 29, 2017,28, 2018, we recognized income tax expensea $7.0 million and $35.0 million fair value adjustment, respectively, due to this shift in timing and its impact on the achievement of $36.1 million,milestones per the purchase agreement. The fair value of the contingent consideration is zero after the aforementioned adjustments as of September 28, 2018.

VTS-270
VTS-270 is our development product to treat Niemann-Pick Type C, a complicated, ultra-rare neurodegenerative disease that typically presents in childhood and is ultimately fatal. The results of our recently completed registration trial for the product did not show a statistically significant separation from placebo. Neither the VTS-270 nor the placebo arm showed disease progression as would be expected for a neurodegenerative condition over 52 weeks of observation. We are in the process of evaluating this portion of the study in order to ensure the data was properly captured and of the highest quality. The FDA indicated to us at a Type A meeting in August 2018 that their view on the potential approvability will be based on the totality of data, not a single study or endpoint. Accordingly, our review of the data from the Phase 2b/3 trial, including the longer term open label portion, continues to proceed and is being assessed in combination with an offsetseveral other available data sources. A better understanding of the potential benefit of VTS-270 will emerge as we carefully consider the totality of data available and continue to deferred tax liabilities commensuratework with the completionprimary investigators and the FDA to determine the best path forward. We will continue to assess the impact of certain aspectsany changes to planned revenue or earnings on the fair value of the Reorganization duringassociated IPR&D asset of $274.5 million included within intangible assets, net on the third quarterunaudited condensed consolidated balance sheet as of 2017.September 28, 2018.



Business Factors Influencing the Results of Operations
Products
The Specialty Generics segment hasAs a result of the Sucampo Acquisition in fiscal 2018, we obtained the sales and may continuemarketing rights for Amitiza and Rescula and acquired an arrangement under which we license certain rights to experience customer consolidation and increased generic product approvals leadingAmitiza to increased competition, which is expected to resulta third party in further downward pressureexchange for royalties on net sales of the product. The addition of these products to our Specialty Brands portfolio contributed to the net sales and operating income within this segment. The aggregate net sales of these products were $50.7 million and cash flows from operations. Net$124.5 million during the three and nine months ended September 28, 2018, respectively, which includes both royalty revenue and product sales. Our cost of sales from the Specialty Generics segment, excluding Methylphenidate ER which is discussed further below, for the three and nine months ended September 29, 2017 were $174.828, 2018 included $31.0 million and $585.5$77.5 million of expense recognition associated with the fair value



adjustments of acquired inventory, respectively compared to $216.4and $18.0 million and $695.3$45.0 million for the threeof amortization associated with intangibles recognized from this acquisition, respectively. Included within selling, general and nine months ended September 30, 2016, respectively.

In November 2014, we were informed by the FDA that it believesadministrative expenses ("SG&A") in our Methylphenidate ER products may not be therapeutically equivalent to the category reference listed drugunaudited condensed consolidated statement of income was $0.5 million and the FDA reclassified our Methylphenidate ER from freely substitutable at the pharmacy level (class AB) to presumed to be therapeutically inequivalent (class BX). The FDA has indicated that it has not identified any serious safety concerns with the products. We continue to market our Methylphenidate ER products as a class BX-rated drug. The FDA's action to reclassify our Methylphenidate ER products had, and is expected to continue to have, a negative impact on net sales and operating income. Net sales$3.2 million of our Methylphenidate ER productstransaction costs incurred during the three and nine months ended September 29, 2017 were $14.3 million and $58.2 million,28, 2018, respectively, compared to $23.4 million and $72.3 million for the three and nine months ended September 30, 2016, respectively.

On October 18, 2016, the FDA initiated proceedings, proposing to withdraw approval of Mallinckrodt’s ANDA for Methylphenidate ER. We have requested a hearing in the withdrawal proceedings, which has been indefinitely deferred by the FDA. We plan to vigorously set forth our position in the withdrawal proceedings. A potential outcome of the withdrawal proceedings is that our Methylphenidate ER products may lose their FDA approval, which could have a material, negative impact to our Specialty Generics segment.

The FDA recently approved new products that are expected to compete with our Methylphenidate ER products, and one competitor recently launched their products. Additional products expected to compete with our Methylphenidate ER products may be launched over the next several quarters. All of these products have a class AB rating compared with the class BX rating on our Methylphenidate ER products. It is uncertain how these product approvals may impact the FDA's withdrawal proceedings associated with our Methylphenidate ER products.acquisition.


Restructuring Initiatives
We continue to realign our cost structure due to the changing nature of our business and look for opportunities to achieve operating efficiencies.
In July 2016, our Board of Directors approved a $100.0 million to $125.0 million restructuring program ("the 2016 Mallinckrodt Program") designed to further improve our cost structure, as we continue to transform our business. The 2016 Mallinckrodt Program is expected to include actions across both the Specialty Brands segment and the Specialty Generics segments,Disposal Group, as well as within corporate functions. There is no specified time period associated with the 2016 Mallinckrodt Program. Through September 29, 2017,28, 2018, we incurred restructuring charges of $49.2$120.9 million under the 2016 Mallinckrodt Program, which are expected to generate savings, primarily within our selling, general and administrativeSG&A expenses. The 2016 Mallinckrodt Program is substantially complete.
In February 2018, our Board of Directors approved a $100.0 million to $125.0 million restructuring program ("SG&A"the 2018 Mallinckrodt Program") that is of similar design as the 2016 Mallinckrodt Program. The utilization of the 2018 Mallinckrodt Program commenced upon substantial completion of the 2016 Mallinckrodt Program. There is no specified time period associated with the 2018 Mallinckrodt Program. Through September 28, 2018, we incurred restructuring charges of $5.2 million under the 2018 Mallinckrodt Program, which are expected to generate savings, primarily within our SG&A expenses.
In addition to the 2016 and 2018 Mallinckrodt Program,Programs, we take certain restructuring actions to generate synergies from our acquisitions.

On January 8, 2018 we announced that we would discontinue marketing of Raplixa® after an evaluation of strategic options. During the nine months ended September 28, 2018, we incurred restructuring expenses of $48.8 million under the 2016 Mallinckrodt Program, consisting primarily of contract termination costs related to the production of Raplixa. Amounts paid in the future may differ from the amount currently recorded.

Research and Development Investment
We devote significant resources to research and development ("R&D") of products and proprietary drug technologies. We incurred R&D expenses from continuing operations of $78.5 million and $223.9 million for the three and nine months ended September 28, 2018, respectively, and $46.9 million and $144.2 million for the three and nine months ended September 29, 2017, respectively. We expect to continue to pursue targeted investments in research and development ("R&D")&D activities, both for existing products and the development of new portfolio assets. We intend to focus our R&D investments in the specialty pharmaceuticals areas, specifically investments to support our Specialty Brands business, where we believe there is the greatest opportunity for growth and profitability. Our Specialty Brands include medicines
On April 5, 2018 (the "Exercise Date"), we exercised the option under our collaborative agreement with CPP to negotiate terms of an exclusive license to develop and commercialize CPP-1X/sulindac in North America. In addition, we provided CPP with a $10.0 million upfront R&D payment for pain management, acute and critical care, and autoimmune and rare diseases (“ARD”). Our primary focus forexpenses related to the latter includesFAP pivotal trial incurred during the therapeutic areas of neurology, rheumatology, nephrology, pulmonology and ophthalmology.
Specialty Brands. We devote significant R&D resources to our branded products. Our R&D investments center on building a diverse, durable portfolio of innovative therapies that provide value to patients, physicians and payers. We are leveraging both organic development and acquiring late stage development assets"Negotiation Period", or the period from the Exercise Date through the execution of our “acquiresuch license agreement. CPP shall return to invest” strategyus any portion of the R&D payment that is not utilized during the Negotiation Period. Of the $10.0 million upfront payment, $7.3 million was utilized during the nine months ended September 28, 2018 and recorded as R&D expense within the unaudited condensed consolidated statement of income. The remaining $2.7 million was included in prepaid expenses and other current assets on the unaudited condensed consolidated balance sheet as of September 28, 2018.
On August 4, 2018, the license agreement with CPP was executed and the Company paid $5.0 million upfront with cash on hand and gained exclusive rights to facilitate organic


growth. Underdevelop and commercialize the product in North America, if approved. The agreement includes additional payments of up to $185.0 million dependent on developmental, regulatory and sales milestones, subject to reduction up to $15.0 million related to amounts provided by the Company in advance of entering into this strategy, we look to acquire durable, but currently under-resourced assetsagreement, and provides for which we believe we can accelerate growthboth parties' reimbursement of R&D expenses from future profits. Following the commercialization of the product, CPP and expand reach to patientsthe Company will share profits in accordance with unmet medical needs.
Data generation is an important strategic driver for our key products in development as they extend evidence in approved uses, label enhancements and new indications. Our strategy is realized through investments in both clinical and health economic activities. We are committed to supporting research that helps advance the understanding and treatment of a variety of different disease states thatagreement. The Company will furthermanage the understanding and development of our currently marketed products, including Acthar®, Inomax, Ofirmev®, and Therakos immunotherapy.
Our "acquire to invest" strategy also includes the acquisition and licensing of early and late stage development products to meet the needs of underserved patient populations. Under our strategy we continue the development process and perform clinical trials to support FDA approval of new products. The most significant development products in our pipeline are:
Terlipressin is being investigated for the treatment of Hepatorenal Syndrome ("HRS") type 1, an acute, rare and life-threatening condition requiring hospitalization, with no currently approved therapy in the U.S. or Canada. In July 2016, we enrolled the first patient in our Phase 3 clinical study to evaluate the efficacy and safety of terlipressin (for injection) in subjects with HRS type 1. In July 2017, we announced the enrollment of the 75th subject in our ongoing Phase 3 clinical study, achieving one quarter of our target enrollment for this trial.
StrataGraft is an investigational product in Phase 3 development for treatment of severe, deep partial thickness burns and Phase 2 development for treatment of severe, full thickness burns. In 2012, the FDA granted StrataGraft orphan product status, and the product is being developed as a biologic to be filed under a biologic license application that would confer regulatory protection until 2032. In June 2017, we announced the enrollment of the first patient in our Phase 3 clinical study to evaluate the efficacy and safety of StrataGraft regenerative skin tissue in the promotion of autologous skin regeneration of complex skin defects due to thermal burns that contain intact dermal elements. In July 2017, we announced that StrataGraft is among the first products to be designated as a Regenerative Medicine Advanced Therapy ("RMAT") by the FDA under the provisions of the 21st Century Cures Act. The RMAT designation allows for earlier and increased interactions with the FDA, including discussions of whether priority review and/or accelerated approval would be appropriate based on surrogate or intermediate endpoints that would be reasonably likely to predict long-term clinical benefit; or reliance upon data obtained from a meaningful number of sites.North America.
MNK-1411 (the product formerly described as Synacthen Depot®) is a depot formulation of Synacthen (tetracosactide), a synthetic 24 amino acid melanocortin receptor agonist. In August 2016, we announced that the FDA has granted our request for fast track designation for its Investigational New Drug ("IND") application for MNK-1411 in the treatment of Duchenne muscular dystrophy ("DMD"). The FDA's fast track designation is a process designed to facilitate the development, and expedite the review of drugs to treat serious conditions that fill an unmet medical need. We completed a Phase 1 study for MNK-1411 in healthy volunteers, and are using the information that was derived to determine optimal dosing in our Phase 2 trial, which is expected to commence during the next six months. In July 2017, we announced that the FDA had granted orphan drug designation to MNK-1411 for the treatment of DMD.
Stannsoporfin, a heme oxygenase inhibitor, is under investigation for its potential to reduce the production of bilirubin. If approved, stannsoporfin is expected to be a highly effective therapy used for near- and full-term infants at risk of developing complications associated with severe jaundice. This new treatment option may reduce the number of newborns advancing to bilirubin levels requiring more intrusive, less specific therapies, most often blood exchange transfusion and less frequently intravenous immunoglobululin infusions ("IVIG"), both of which have a more complex and lengthy administration than stannsoporfin's single injection. Stannsoporfin, if approved, may also decrease the risks associated with other treatments (e.g., bilirubin rebound) and the risk of prolonged and/or severe bilirubin elevation, which can impact central nervous system development. In December 2016, stannsoporfin was granted fast track designation by the FDA. After our recent acquisition of this product through the InfaCare Acquisition, we expect to submit our new drug application ("NDA") to the FDA by the end of fiscal 2017.
Xenon is a noble gas that has been used safely as an inhaled therapy in several studies to date. Following cardiac arrest, calcium channels in the brain can get over-activated, causing neuronal damage and cell death. When inhaled, xenon binds to N-methyl-D-aspartate receptors through a unique glycine-binding mechanism and can help regulate the flow of ions through the calcium channels. By mitigating neuronal damage and cell death following a cardiac arrest, inhaled xenon may be able to reduce time in coma, lower mortality rates and improve cognitive and motor functions. The Phase 3 trial, being conducted under an FDA Special Protocol Agreement, or SPA, is currently expected to begin in early 2018.
Specialty Generics. Specialty Generics development is focused on hard-to-manufacture pharmaceuticals with difficult-to-replicate pharmacokinetic profiles. Our Specialty Generics pipeline consists of several products in various stages of development. We currently perform most of our development work at our Specialty Generics headquarters and technical development center in Webster Groves, Missouri.









Results of Operations
Three Months Ended September 29, 201728, 2018 Compared with Three Months Ended September 30, 201629, 2017


Net Sales
Net sales by geographic area were as follows (dollars in millions): 
Three Months Ended  Three Months Ended  
September 29,
2017
 September 30,
2016
 Percentage
Change
September 28,
2018
 September 29,
2017
 Percentage
Change
U.S.$711.0
 $814.1
 (12.7)%$576.4
 $563.4
 2.3%
Europe, Middle East and Africa60.3
 54.4
 10.8
36.9
 16.0
 130.6
Other22.6
 18.7
 20.9
Other geographic areas26.7
 21.2
 25.9
Net sales$793.9
 $887.2
 (10.5)$640.0
 $600.6
 6.6


Net sales for the three months ended September 29, 2017 decreased $93.328, 2018 increased $39.4 million, or 10.5%6.6%, to $793.9$640.0 million, compared with $887.2$600.6 million for the three months ended September 30, 2016.29, 2017. This decreaseincrease was due toprimarily driven by net sales of the newly acquired Amitiza product, strength in Ofirmev® and Therakos® demand, and benefits of Inomax® contracting and consumption. These increases were partially offset by decreased net sales from both of our segments as overall net sales growth was impactedH.P. Acthar® Gel driven by the extra selling week duringresidual impact of previously reported patient withdrawal issues. We have taken a number of steps to address the three months ended September 30, 2016. Our Specialty Generics segment continues to experience a decrease in net sales due to increased competitionissue, including engagement with payers, prescribers and customer consolidation, which has resulted in downward pricing pressure. Our Specialty Brands segmentpatients. In addition, we experienced a decrease inlower net sales in Other branded products primarily driven bydue to the sale of our Intrathecal Therapy business inRecothrom during the first quarter of 2017. Net sales related to Acthar also experienced a decrease, impacted by the extra selling week during the comparable period in 2016 and volume declines. We believe these lower volumes of Acthar resulted from an increasing number of written prescriptions going unfilled due to the challenging reimbursement environment.2018. For further information on changes in our net sales, refer to "Business Segment"Segment Results" within this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.


Operating Income
Gross profit. Gross profit for the three months ended September 29, 201728, 2018 decreased $89.6$18.8 million, or 18.3%5.7%, to $400.6$313.8 million, compared with $490.2$332.6 million for the three months ended September 30, 2016.29, 2017. Gross profit margin was 50.5%49.0% for the three months ended September 28, 2018, compared with 55.4% for the three months ended September 29, 2017, compared with 55.3% for the three months ended September 30, 2016.2017. The decrease in gross profit and gross profit margin was partiallyprimarily attributable to channel consolidationamortization of the Amitiza intangible asset and increased price competition inexpense recognition of inventory fair value adjustments associated with the Specialty Generics business, contributing to a $46.2 million decline in that segment's gross profit. Also negatively impacting gross profit this quarter was the lower net sales in the higher margin Specialty Brands business and a $10.6 million increase in royalty expense attributable to our Specialty Brands segment.product.
Selling, general and administrative expenses. SG&A expenses for the three months ended September 29, 201728, 2018 were $205.7$164.0 million, compared with $267.8$186.3 million for the three months ended September 30, 2016,29, 2017, a decrease of $62.1$22.3 million, or 23.2%12.0%. The decrease was attributable to various factors, including an $11.8 million reduction in the accrual associated with our Lower Passaic River, New Jersey environmental remediation liability; a smaller unfavorable adjustment to$7.0 million decrease in fair value of the contingent consideration liabilities,liability related to stannsoporfin; lower employeelegal fees and advertising and promotion expenses; in addition to cost benefits gained from restructuring actions, including lower stock compensation costs, professional fees, acquisition related expenses and pension expense following the settlement of our defined benefit pension plans; all of whichexpenses. These changes were partially offset by a loss fromhigher one-time employee compensation costs and professional fees. SG&A expenses were 25.6% of net sales for the effects of our foreign currency hedges, which was entered into during the ninethree months ended September 29, 2017, charitable contributions28, 2018 and legal expenses. SG&A expenses were 25.9%31.0% of net sales for the three months ended September 29, 20172017.
Research and 30.2% of net salesdevelopment expenses. R&D expenses increased $31.6 million, or 67.4%, to $78.5 million for the three months ended September 30, 2016.
Research and development expenses. R&D expenses decreased $8.4 million, or 12.4%, to $59.528, 2018, compared with $46.9 million for the three months ended September 29, 2017, compared with $67.9 million for the three months ended September 30, 2016.2017. The decreaseincrease was primarily attributable to lower spend in the Specialty Generics segment and the sale of our Intrathecal Therapy business in the first quarter of 2017. These decreases were partially offset by increased R&D expenses in our Specialty Brands segment, where ouradditional pipeline products are concentrated.that have been acquired within the past year. Current R&D activities focus on performing clinical studies and publishing clinical and non-clinical experiences and evidence that support health economic activities and patient outcomes. As a percentage of net sales, R&D expenses were 7.5%12.3% and 7.7%7.8% for the three months ended September 28, 2018 and September 29, 2017, and September 30, 2016, respectively.
Restructuring charges, net. During the three months ended September 28, 2018, we recorded $19.6 million of restructuring and related charges, net, including $4.9 million of accelerated depreciation in SG&A and cost of sales, primarily related to employee severance and benefits and exiting certain facilities. During the three months ended September 29, 2017, we recorded $15.5$16.1 million of restructuring and related charges, net, including $1.2$0.7 million of accelerated depreciation in SG&A and cost of sales, primarily related to exiting certain facilities.
Losses on divestiture. During the three months ended September 30, 2016,28, 2018, we recorded restructuring and related charges, net, of $8.7


a $0.6 million including $1.9 million of accelerated depreciation in SG&A and cost of sales, primarilypre-tax loss associated with a post-sale closing inventory adjustment related to employee severance benefits across boththe sale of a portion of our segmentsHemostasis business, inclusive of our PreveLeak and corporate functions.
Losses on divestiture and license. Recothrom products. During the three months ended September 29, 2017, we recorded a $0.4 million pre-tax loss associated with the final working capital adjustmentadditional transaction costs related to the sale of our Intrathecal Therapy business.




Non-Operating Items
Interest expense and interest income. During the three months ended September 29, 201728, 2018 and September 30, 2016,29, 2017, net interest expense was $91.6 million and $91.3 million, and $93.5 million, respectively. Interest expenseThis increase was attributable to a higher average outstanding debt balance during the three months ended September 29,28, 2018, following the close of the Sucampo Acquisition, which yielded an increase in interest expense of $12.2 million over the comparable period. This was partially offset by an $11.2 million decrease in interest accrued on deferred tax liabilities associated with outstanding installment notes primarily due to our fiscal 2017 legal entity reorganization and September 30, 2016 included $5.3 millionthe Tax Cut and $6.3 million, respectively, of non-cash interest expense.Jobs Act ("TCJA") that reduced the interest-bearing U.S. deferred tax liabilities balance. In addition, interest income increased to $2.0 million for the three months ended September 28, 2018, compared with $1.3 million for the three months ended September 29, 2017 compared with $0.5 million forprimarily related to higher interest earned on our money market funds.
Other income, net. During the three months ended September 30, 2016.
Other income (expense), net. During the three months ended28, 2018 and September 29, 2017, we recorded other income, net, of $3.7$13.4 million and $3.0 million, respectively. The increase is primarily attributable to the receipt of $8.2 million of royalty income and a refund of $3.4 million of the initial cash contribution related to the settlement of remaining obligations of six defined benefit pension plans that were terminated during the three months ended September 30, 2016, we recorded other expense, net, of $0.6 million. The three months ended September 29, 2017 included a $1.7 million gain on certain debt repurchases, that aggregated to a total principal amount of $13.0 million.fiscal 2016. The remaining amounts in both fiscal years represented items including gains and losses on intercompany financing, foreign currency transactions and related hedging instruments.
Income tax expense (benefit). Incomebenefit. We recognized an income tax benefit was $31.2of $125.2 million on incomea loss from continuing operations before income taxes of $33.1$22.2 million for the three months ended September 28, 2018, and an income tax benefit of $57.8 million on a loss from continuing operations before income taxes of $4.7 million for the three months ended September 29, 2017 and an income tax benefit of $56.4 million on income from continuing operations before income taxes of $53.6 million for the three months ended September 30, 2016.2017. This resulted in effective tax rates of negative 94.3%564.0% and negative 105.2%1,229.8% for the three months ended September 28, 2018 and September 29, 2017, respectively. The income tax benefit for the three months ended September 28, 2018 is comprised of $16.1 million of current tax expense and September 30, 2016, respectively.$141.3 million of deferred tax benefit which is predominantly related to acquired intangible assets and the generation of net operating losses. The income tax benefit for the three months ended September 29, 2017 is comprised of $60.0$81.4 million of current tax benefit and $28.8$23.6 million of deferred tax expense. The net deferred tax expense of $28.8$23.6 million includes $45.5$50.7 million of deferred tax benefit which is predominantly related to acquired intangible assets offset by $74.3 million of deferred tax expense related to utilization of tax attributes.
The income tax benefit was $125.2 million for the three months ended September 30, 2016 is comprised of $37.9 million of current tax expense and $94.3 million of deferred28, 2018, compared with a tax benefit which is predominantly related to acquired intangible assets.
The effective tax rateof $57.8 million for the three months ended September 29, 2017, as compared with2017. The $67.4 million net increase in the tax benefit includes an increase of $82.3 million attributable to the tax benefit from the reorganization of the Company's intercompany financing and associated legal entity ownership which occurred during the three months ended September 30, 2016 increased by 10.9 percentage points. Included within this net28, 2018, an increase wasof $17.3 million attributable to tax expense from a 109.4 percentage point increase related to the completion of certain aspects of the reorganization of our legal entity ownership which occurred during the three months ended September 29, 2017. Also within this2017, an increase was a 36.7 percentage point increaseof $9.1 million attributable to the recognitiontax benefit from an adjustment to the provisional estimate of previously unrecognizedthe remeasurement of its net U.S. deferred tax benefits, which occurred during the three months ended September 30, 2016. The remaining 135.2 percentage point decrease was primarilyliabilities resulting from U.S. Tax Reform, and an increase in tax benefit of $3.7 million attributable to differing levelsthe impact of income from continuing operations before taxes for the three months endedacquisitions occurring since September 29, 2017 as compared with2017; partially offset by a decrease to tax benefit of $36.7 million attributable to the three months ended September 30, 2016.reduction in the U.S. federal corporate statutory rate resulting from U.S. Tax Reform, and a decrease in tax benefit of $8.3 million attributable to changes in the amount and jurisdictional mix of operating income.
(Loss) incomeIncome from discontinued operations, net of income taxes. We recorded a lossincome from discontinued operations of $0.6$10.8 million and $10.6 million during the three months ended September 28, 2018 and September 29, 2017, compared torespectively. The income from discontinued operations of $5.0 million during the three months ended September 30, 2016. The loss from discontinued operations for the three months ended September 29, 2017 consists28, 2018 consisted of $11.2 million of income from operating results, net of tax, associated with the Specialty Generics Disposal Group and a $0.4 million loss, net of tax, related to various post-sale adjustments associated with our previous divestitures. The income from discontinued operations for the three months ended September 30, 201629, 2017 included $8.4$11.2 million of income from operating results, net of tax, associated with the Nuclear Imaging businessSpecialty Generics Disposal Group and a $4.4$0.6 million loss, on the disposalnet of the CMDS business.tax, related to various post-sale adjustments associated with our previous divestitures





Results of Operations
Nine Months Ended September 29, 201728, 2018 Compared with Nine Months Ended September 30, 201629, 2017
Net Sales
Net sales by geographic area were as follows (dollars in millions): 
Nine Months Ended  Nine Months Ended  
September 29,
2017
 September 30,
2016
 Percentage
Change
September 28,
2018
 September 29,
2017
 Percentage
Change
U.S.$2,197.7
 $2,355.2
 (6.7)%$1,669.0
 $1,665.2
 0.2%
Europe, Middle East and Africa176.2
 162.5
 8.4
101.0
 50.5
 100.0
Other55.4
 51.9
 6.7
Other geographic areas74.3
 45.0
 65.1
Net sales$2,429.3
 $2,569.6
 (5.5)$1,844.3
 $1,760.7
 4.7




Net sales for the nine months ended September 29, 2017 decreased $140.328, 2018 increased $83.6 million, or 5.5%4.7%, to $2,429.3$1,844.3 million, compared with $2,569.6$1,760.7 million for the nine months ended September 30, 2016.29, 2017. This decreaseincrease was due toprimarily driven by net sales of the newly acquired Amitiza product, strength in Ofirmev and Therakos demand and benefits of Inomax contracting and consumption. These increases were partially offset by decreased net sales from both of our segments,H.P. Acthar Gel driven by the residual impact of previously reported patient withdrawal issues. We have taken a number of steps to address the issue, including engagement with the largest decrease in our Specialty Generics segment due to increased competitionpayers, prescribers and customer consolidation, which has resulted in downward pricing pressure. Our Specialty Brands segmentpatients. In addition, we experienced a decrease inlower net sales in Other branded products primarily driven bydue to the sale of Recothrom in the first quarter of 2018 and our Intrathecal Therapy business in the first quarter of 2017 and favorable adjustments to returns reserves in the prior year, both of which were partially offset by favorable pricing for Acthar, in addition to the benefits of Inomax contracting and growth from Ofirmev. In addition, overall net sales growth during the nine months ended September 29, 2017 was negatively impacted by the extra selling week during the nine months ended September 30, 2016.2017. For further information on changes in our net sales, refer to "Business Segment"Segment Results" within this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.


Operating Income
Gross profit. Gross profit for the nine months ended September 29, 201728, 2018 decreased $168.8$44.8 million, or 12.0%4.7%, to $1,235.3$907.6 million, compared with $1,404.1$952.4 million for the nine months ended September 30, 2016.29, 2017. Gross profit margin was 50.9%49.2% for the nine months ended September 28, 2018, compared with 54.1% for the nine months ended September 29, 2017, compared with 54.6% for the nine months ended September 30, 2016.2017. The decrease in gross profit and gross profit margin was primarily attributable to channel consolidationamortization of the Amitiza intangible asset and increased price competition inexpense recognition of inventory fair value adjustments associated with the Specialty Generics business, contributing to a $129.5 million decline in that segment's gross profit. Also negatively impacting gross profit this quarter was the lower net sales in the higher margin Specialty Brands business and increases of $11.0 million in royalty expense and $8.2 million in inventory provision expense, both of which were attributable to our Specialty Brands segment.product.
Selling, general and administrative expenses. SG&A expenses for the nine months ended September 29, 201728, 2018 were $745.9$520.7 million, compared with $702.0$618.5 million for the nine months ended September 30, 2016, an increase29, 2017, a decrease of $43.9$97.8 million, or 6.3%15.8%. This decrease was primarily attributable to various factors, including a $35.0 million decrease in fair value of the contingent consideration liability related to stannsoporfin; cost benefits gained from restructuring actions, including lower stock compensation expense and employee compensation costs; an $11.8 million reduction in the accrual associated with our Lower Passaic River, New Jersey environmental remediation liability; in addition to lower legal fees. SG&A expenses were 28.2% of net sales for the nine months ended September 28, 2018 and 35.1% of net sales for the nine months ended September 29, 2017.
Research and development expenses. R&D expenses increased $79.7 million, or 55.3%, to $223.9 million for the nine months ended September 28, 2018, compared with $144.2 million for the nine months ended September 29, 2017. The increase was primarily attributable to the additional pipeline products that have been acquired within the past year. Current R&D activities focus on performing clinical studies and publishing clinical and non-clinical experiences and evidence that support health economic activities and patient outcomes. As a percentage of net sales, R&D expenses were 12.1% and 8.2% for the nine months ended September 28, 2018 and September 29, 2017, respectively.
Restructuring charges, net. During the nine months ended September 28, 2018 we recorded $101.4 million of restructuring and related charges, net, including $4.9 million of accelerated depreciation in SG&A and cost of sales. During the nine months ended September 29, 2017, we recorded $28.4 million including $2.1 million of accelerated depreciation, in cost of sales. The increase over the comparable period was primarily attributable to contract termination costs related to the production of Raplixa, as well as employee severance and benefits and the exiting of certain facilities.
Gains on divestiture. During the nine months ended September 28, 2018, we sold a portion of our Hemostasis business, inclusive of our PreveLeak and Recothrom products. As a result of this sale, we recorded a pre-tax loss of $0.6 million. In comparison, during the nine months ended September 29, 2017, we recorded a $56.6 million pre-tax gain associated with the sale of our Intrathecal Therapy business.




Non-Operating Items
Interest expense and interest income. During the nine months ended September 28, 2018 and September 29, 2017, net interest expense was $273.5 million and $276.2 million, respectively. Interest accrued on deferred tax liabilities associated with outstanding installment notes decreased $35.8 million primarily due to our fiscal 2017 legal entity reorganization and the TCJA that reduced the interest-bearing U.S. deferred tax liabilities balance. Also, non-cash interest expense decreased by $1.2 million over the comparable period. These decreases were partially offset by a higher average outstanding debt balance during the nine months ended September 28, 2018, following the close of the Sucampo Acquisition, which yielded an increase in interest expense of $38.1 million over the comparable period. During the nine months ended September 28, 2018, we also recognized interest income of $6.6 million compared to $2.8 million during the nine months ended September 29, 2017 primarily related to higher interest earned on our money market funds.
Other income (expense), net. During the nine months ended September 28, 2018, we recorded other income, net, of $17.5 million and during the nine months ended September 29, 2017, we recorded other expense, net, of $70.6 million. The nine months ended September 28, 2018 included royalty income received of $8.2 million, a gain of $6.5 million on debt repurchased and a refund of $3.4 million of the initial cash contribution related to the settlement of remaining obligations of six defined benefit pension plans that were terminated during fiscal 2016. The nine months ended September 29, 2017 included a $69.7 million charge from the recognition of previously deferred losses on the settlement of obligations associated with the termination of six defined benefit pension plans. The remaining change consisted of various factors, including higher stock compensation expense and charitable contributions, partially offset by lower advertising and promotion expenses, professional fees, employee compensation costs, legal fees and pension expense following theThis settlement charge was reclassified from SG&A to other income (expense), net as a result of our defined benefit pension plans. SG&A expenses were 30.7%adoption of net sales forAccounting Standards Update 2017-07, "Compensation - Retirement Benefits: Improving the nine months ended September 29, 2017Presentation of Net Periodic Pension Cost and 27.3% of net sales for the nine months ended September 30, 2016. The higher percentage of net sales is attributable to the aforementioned pension settlement charge, which represented 2.9% of net sales for the nine months ended September 29, 2017, and the various other aforementioned factors.
Research and development expenses. R&D expenses decreased $9.9 million, or 4.9%, to $190.9 million for the nine months ended September 29, 2017, compared with $200.8 million for the nine months ended September 30, 2016. The decrease was attributable to lower spend in the Specialty Generics segment and the sale of our Intrathecal Therapy business in the first quarter of 2017. These decreases were partially offset by increased R&D expenses from our Specialty Brands segment, where our most pipeline products are concentrated. Current R&D activities focus on performing clinical studies and publishing clinical and non-clinical experiences and evidence that support health economic and patient outcomes. As a percentage of net sales, R&D expenses were 7.9% and 7.8% for the nine months ended September 29, 2017 and September 30, 2016, respectively.
Restructuring charges, net. During the nine months ended September 29, 2017, we recorded $35.7 million of restructuring and related charges, net, including $3.6 million of accelerated depreciation in SG&A and cost of sales, primarily related to exiting certain facilities and employee severance and benefits across both our segments and corporate functions. During the nine months ended September 30, 2016, we recorded restructuring and related charges, net, of $34.0 million, including $4.8 million of accelerated depreciation in SG&A and cost of sales, primarily related to employee severance benefits across both of our segments and corporate functions.
Non-restructuring impairment charges. During the nine months ended September 30, 2016, we recorded $16.9 million in charges related to in-process research and development intangible assets associated with the CNS Therapeutics acquisitionNet Periodic Post Retirement Benefit Cost," in fiscal 2013. The impairments resulted from delays in anticipated FDA approval, higher than expected development costs and lower than previously anticipated commercial opportunities.
Gains on divestiture and license. During the nine months ended September 29, 2017, we recorded a $56.6 million pre-tax gain associated with the sale of our Intrathecal Therapy business.

Non-Operating Items
Interest expense and interest income. During the nine months ended September 29, 2017 and September 30, 2016, net interest expense was $276.2 million and $285.7 million, respectively. This decrease was primarily driven by a lower average outstanding


debt balance that contributed $1.1 million to the decrease.2018, which required retroactive application. In addition, interest expense during the nine months ended September 29, 2017 and September 30, 2016 included $16.9 million and $19.7 million, respectively, of non-cash interest expense. Lastly, there was a $1.2 million decrease in interest accrued on deferred tax liabilities associated with outstanding installment notes due to payments that reduced the deferred tax liability balance.
Other income (expense), net. During the nine months ended September 29, 2017, we recorded other income, net, of $6.2 million and during the nine months ended September 30, 2016, we recorded other expense, net, of $2.6 million. The nine months ended September 29, 2017 included a $10.0 million charge associated with the refinancing of our term loan partially offset by an $8.3 million gain on debt repurchases, that aggregated to a total principal amount of $66.9 million.during the nine months ended September 29, 2017. The remaining amounts in both fiscal yearsperiods represented items including gains and losses on intercompany financing, foreign currency transactions and related hedging instruments.
Income tax expense (benefit). Incomebenefit. We recognized an income tax benefit was $110.8of $222.0 million on incomea loss from continuing operations before income taxes of $53.0$190.1 million for the nine months ended September 28, 2018, and an income tax benefit of $153.4 million on a loss from continuing operations before income taxes of $126.8 million for the nine months ended September 29, 2017 and an income tax benefit of $218.3 million on income from continuing operations before income taxes of $166.9 million for the nine months ended September 30, 2016.2017. This resulted in effective tax rates of negative 209.1%116.8% and negative 130.8%121.0% for the nine months ended September 28, 2018 and September 29, 2017, respectively. The income tax benefit for the nine months ended September 28, 2018 is comprised of $29.2 million of current tax expense and September 30, 2016, respectively.$251.2 million of deferred tax benefit which is predominantly related to acquired intangible assets and the generation of net operating losses. The income tax benefit for the nine months ended September 29, 2017 is comprised of $20.5$13.6 million of current tax expensebenefit and $131.3$139.8 million of deferred tax benefit. The net deferred tax benefit of $131.3$139.8 million includes $232.8$241.3 million of deferred tax benefit, which is predominantly related to acquired intangible assets offset by $101.5 million of deferred tax expense related to utilization of tax attributes.
The income tax benefit was $222.0 million for the nine months ended September 30, 2016 is comprised of $85.9 million of current tax expense and $304.2 million of deferred28, 2018, compared with a tax benefit which is predominantly related to acquired intangible assets.
The effective tax rateof $153.4 million for the nine months ended September 29, 2017, as compared with2017. The $68.6 million net increase in the nine months ended September 30, 2016 decreased by 78.3 percentage points. Included within this net decrease was a 183.5 percentage point decrease primarilytax benefit includes an increase of $82.3 million attributable to differing levels of income from continuing operations before taxes for the nine months ended September 29, 2017 as compared with the nine months ended September 30, 2016. Of the remaining 105.2 percentage point increase, a 16.5 percentage point increase is related to the tax benefit from reorganization of a U.K. tax credit on a dividend between affiliates,the Company's intercompany financing and associated legal entity ownership which occurred during the nine months ended September 30, 2016, a 5.0 percentage point28, 2018, an increase relatedof $27.1 million attributable to tax expense from the divestitureimpact of the Intrathecal Therapy Business, which occurreddispositions predominately occurring during the nine months ended September 29, 2017, a 15.5 percentage pointan increase of $17.3 million attributable to the recognition of previously unrecognized tax benefits, which occurred within the nine months ended September 30, 2016, andexpense from a 68.2 percentage point increase related to the completion of certain aspects of the reorganization of our legal entity ownership which occurred during the nine months ended September 29, 2017, an increase in tax benefit of $11.8 million attributable to the impact of acquisitions occurring since September 29, 2017, an increase of $9.1 million attributable to the tax benefit from an adjustment to the provisional estimate of the remeasurement of its net U.S. deferred tax liabilities resulting from U.S. Tax Reform, and an increase in tax benefit of $9.1 million attributable to changes in the amount and jurisdictional mix of operating income; partially offset by a decrease to tax benefit of $70.0 million attributable to the reduction in the U.S. federal corporate statutory rate from U.S. Tax Reform, and a decrease of $18.1 million attributable to tax benefit from the termination of the defined benefit pension plans which occurred during the nine months ended September 29, 2017.
Income from discontinued operations, net of income taxes. We recorded income from discontinued operations of $361.9$79.5 million and $47.4$499.1 million during the nine months ended September 28, 2018 and September 29, 2017, respectively. The income from discontinued operations for the nine months ended September 28, 2018 consisted of $64.6 million of income from operating results, net of tax, associated with the Specialty Generics Disposal Group and September 30, 2016, respectively. Income$13.5 million of income, net of tax, from the receipt of contingent consideration related to the sale of the Nuclear Imaging business. The income from discontinued operations for the nine months ended September 29, 2017 includesincluded a $361.7 million gain on divestiture and $4.1 million of income from operating results, both net of tax, associated with the Nuclear Imaging business.business and $137.2 million of income from operating results, net of tax, associated with the Specialty Generics Disposal Group. These were partially offset by various post-sale adjustments associated with our previous divestitures. The income from discontinued operations for the nine months ended September 30, 2016 included $49.2 million of income from operating results associated with the Nuclear Imaging business and a $4.4 million loss on the disposal of the CMDS business.






Segment Results
Our reportable segments consistcontinuing operations are limited to the results of operations from the Specialty Brands andsegment as the Specialty Generics.Generics Disposal Group is reported as a discontinued operation. Management measures and evaluates our operating segmentsSpecialty Brands segment based on segment net sales and operating income. Management excludes certain corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment operating income because management evaluates the operating results of the segmentssegment excluding such items. These items include net sales and expenses associated with sales of products to the acquirer of the CMDS business under an ongoing supply agreement, intangible asset amortization, impairments and net restructuring and related charges. Although these amounts are excluded from segment operating income, as applicable, they are included in reported consolidated operating income and in the reconciliations presented below. Selected information by business segment is as follows:


Three Months Ended September 29, 201728, 2018 Compared with Three Months Ended September 30, 2016

29, 2017
Net Sales


Net sales by segment are shown in the following table (dollars in millions): 
 Three Months Ended  
 September 29,
2017
 September 30,
2016
 
Percentage
Change
Specialty Brands$591.4
 $633.1
 (6.6)%
Specialty Generics189.1
 239.8
 (21.1)
Net sales of operating segments780.5
 872.9
 (10.6)
Other (1)
13.4
 14.3
 (6.3)
Net sales$793.9
 $887.2
 (10.5)
(1)Represents net sales from an ongoing, post-divestiture supply agreement with the acquirer of the CMDS business.

Specialty Brands.Net sales for the three months ended September 29, 2017 decreased $41.7 million to $591.4 million, compared with $633.1 million for the three months ended September 30, 2016. Overall net sales growth during the three months ended September 29, 2017 was negatively impacted by the extra selling week during the three months ended September 30, 2016. Our Other products experienced a $21.8 million or 68.3% decrease in net sales compared with the three months ended September 30, 2016, primarily due to the sale of our Intrathecal Therapy business in the first quarter of 2017, which contributed $12.3 million of net sales during the comparable period in 2016. The decrease in net sales related to our Other products was also driven by a $4.6 million decrease in net sales of Exalgo (hydromorphone HCI) extended-release tablets, CII ("Exalgo"). Net sales related to Acthar decreased by $18.3 million or 5.6% compared with the three months ended September 30, 2016, impacted by the extra selling week during the comparable period in 2016 and volume declines. We believe these lower volumes of Acthar resulted from an increasing number of written prescriptions going unfilled due to the challenging reimbursement environment.

Net sales for Specialty Brands by geography were as follows (dollars in millions):
 Three Months Ended  
 September 29,
2017
 September 30,
2016
 Percentage
Change
U.S.$570.3
 $613.9
 (7.1)%
Europe, Middle East and Africa19.1
 17.7
 7.9
Other2.0
 1.5
 33.3
Net sales$591.4
 $633.1
 (6.6)

Net sales for Specialty Brands by key products were as follows (dollars in millions):
Three Months Ended  Three Months Ended  
September 29,
2017
 September 30,
2016
 Percentage ChangeSeptember 28,
2018
 September 29,
2017
 Percentage Change
Acthar$308.7
 $327.0
 (5.6)%
H.P. Acthar Gel$290.1
 $308.7
 (6.0)%
Inomax125.7
 126.9
 (0.9)133.2
 125.7
 6.0
Ofirmev75.4
 75.6
 (0.3)87.1
 75.4
 15.5
Therakos immunotherapy55.3
 54.5
 1.5
Hemostasis products16.2
 17.2
 (5.8)
Therakos60.0
 55.3
 8.5
Amitiza (1)
48.2
 
 
BioVectra13.9
 16.0
 (13.1)
Other10.1
 31.9
 (68.3)7.5
 19.5
 (61.5)
Specialty Brands$591.4
 $633.1
 (6.6)$640.0
 $600.6
 6.6

(1)Amitiza consists of both product net sales and royalties. Refer to Note 3 to the unaudited condensed consolidated financial statements for further information on Amitiza's revenue.

Specialty Generics. Brands.Net sales for the three months ended September 29, 2017 decreased $50.728, 2018 increased $39.4 million or 21.1%, to $189.1$640.0 million, compared with $239.8$600.6 million for the three months ended September 30, 2016.29, 2017. The decreaseincrease in net sales was primarily driven by decreases of $20.8 million, $15.4 million and $9.1 million in hydrocodone related products, oxycodone related products and methylphenidate ER, respectively. These decreases were due to increased competition and customer consolidation, which has resulted in downward pricing pressure. In addition, overall net sales growthof $48.2 million from the newly acquired Amitiza product and an increase in Ofirmev, Therakos and Inomax net sales compared with the three months ended September 29, 2017 as Ofirmev and Therakos experienced increased demand and Inomax net sales continue to benefit from favorable contracting and consumption. These increases were partially offset by an $18.6 million or 6.0% decrease in H.P. Acthar Gel net sales driven by the residual impact of previously reported patient withdrawal issues, and a $12.0 million or 61.5% decrease in Other products compared with the three months ended September 29, 2017. The decrease in Other products net sales is primarily attributable to the sale of Recothrom during the first quarter of 2018, which contributed net sales of $15.3 million during the three months ended September 29, 2017 was negatively impacted by the extra selling week during the three months ended September 30, 2016.2017.



Net sales for Specialty Generics by geography were as follows (dollars in millions):
 Three Months Ended  
 September 29,
2017
 September 30,
2016
 Percentage
Change
U.S.$140.7
 $200.3
 (29.8)%
Europe, Middle East and Africa27.8
 22.2
 25.2
Other20.6
 17.3
 19.1
Net sales$189.1
 $239.8
 (21.1)

Net sales for Specialty Generics by key products were as follows (dollars in millions):
 Three Months Ended  
 September 29,
2017
 September 30,
2016
 Percentage Change
Hydrocodone (API) and hydrocodone-containing tablets$10.0
 $30.8
 (67.5)%
Oxycodone (API) and oxycodone-containing tablets13.4
 28.8
 (53.5)
Methylphenidate ER14.3
 23.4
 (38.9)
Other controlled substances103.9
 111.8
 (7.1)
Other products47.5
 45.0
 5.6
Specialty Generics$189.1
 $239.8
 (21.1)


Operating Income
Operating income by segment and as a percentage of segment net sales for the three months ended September 29, 201728, 2018 and September 30, 201629, 2017 is shown in the following table (dollars in millions):
Three Months EndedThree Months Ended
September 29, 2017 September 30, 2016September 28, 2018 September 29, 2017
Specialty Brands$316.6
 53.5% $334.1
 52.8%$287.8
 45.0% $314.8
 52.4%
Specialty Generics40.4
 21.4
 63.9
 26.6
Segment operating income357.0
 45.7
 398.0
 45.6
Unallocated amounts:              
Corporate and allocated expenses(47.6)   (65.7)  (28.0)   (45.8)  
Intangible asset amortization(173.2)   (175.9)  (184.2)   (169.3)  
Restructuring and related charges, net (1)
(15.5)   (8.7)  (19.6)   (16.1)  
Total operating income$120.7
   $147.7
  $56.0
   $83.6
  
(1)Includes restructuring-related accelerated depreciation.





Specialty Brands. Operating income for the three months ended September 29, 201728, 2018 decreased $17.5$27.0 million to $316.6$287.8 million, compared with $334.1$314.8 million for the three months ended September 30, 2016.29, 2017. Operating margin increaseddecreased to 53.5%45.0% for the three months ended September 28, 2018 compared with 52.4% for the three months ended September 29, 2017 compared with 52.8% for the three months ended September 30, 2016.2017. The decrease in operating income and margin was impacted byprimarily due to a $41.7$31.6 million decreaseincrease in net sales, as previously mentioned, in addition to increased royalty expense of $10.6 million. R&D expenses also increased by $2.9 million.over the comparable period and expense recognition of inventory fair value adjustments associated with Amitiza. These changes were partially offset by a decrease of $32.0$5.4 million in SG&A expenses compared with the three months ended September 30, 2016 as a result of29, 2017 primarily due to lower advertising and promotion expenses, legal fees and cost benefits gained from restructuring actions.actions, including stock compensation expenses and employee compensation costs partially offset by increased professional fees.
Specialty Generics. Operating income for the three months ended September 29, 2017 decreased $23.5Corporate and allocated expenses. Corporate and allocated expenses were $28.0 million to $40.4 million, compared with $63.9and $45.8 million for the three months ended September 30, 2016. Operating margin decreased28, 2018 and September 29, 2017, respectively. This decrease was primarily driven by an $11.8 million reduction in the accrual associated with our Lower Passaic River, New Jersey environmental remediation liability and a $7.0 million decrease in fair value of the contingent consideration liability related to 21.4% forstannsoporfin during the three months ended September 29, 2017, compared with 26.6% for the three months ended September 30, 2016. The decrease in operating income and margin was impacted by the $50.7 million decrease in net sales due to customer consolidation and additional competitors that has led to price decreases, which resulted in a $46.2 million unfavorable gross profit impact. SG&A


expenses decreased by $11.0 million as a result of cost benefits gained from restructuring actions. R&D expenses also decreased by $11.8 million compared with the three months ended September 30, 2016.
Corporate and allocated expenses. Corporate and allocated expenses were $47.6 million and $65.7 million for the three months ended September 29, 2017 and September 30, 2016, respectively. The decrease reflects an $11.2 million favorable variance in adjustments to contingent consideration liabilities, primarily due to a larger unfavorable adjustment in the three months ended September 30, 2016. The remaining decrease of $6.9 million consisted of various factors, including lower employee compensation costs, acquisition related expenses, advertising and promotions expense and pension expense following the settlement of our six defined benefit pension plans; all of which were28, 2018, partially offset by higher facility expenses and stockone-time employee compensation expense.costs.


Nine Months Ended September 29, 201728, 2018 Compared with Nine Months Ended September 30, 2016

29, 2017
Net Sales
Net sales by segment are shown in the following table (dollars in millions): 
 Nine Months Ended  
 September 29,
2017
 September 30,
2016
 
Percentage
Change
Specialty Brands$1,743.1
 $1,757.4
 (0.8)%
Specialty Generics643.7
 767.6
 (16.1)
Net sales of operating segments2,386.8
 2,525.0
 (5.5)
Other (1)
42.5
 44.6
 (4.7)
Net sales$2,429.3
 $2,569.6
 (5.5)
(1)Represents net sales from an ongoing, post-divestiture supply agreement with the acquirer of the CMDS business.

Specialty Brands. Net sales for the nine months ended September 29, 2017 decreased $14.3 million to $1,743.1 million, compared with $1,757.4 million for the nine months ended September 30, 2016. The decrease in net sales was primarily driven by a $64.5 million or 62.6% decrease in Other products compared with the nine months ended September 30, 2016. The decrease is primarily attributable to a $22.8 million decrease in Exalgo driven by lower volumes, an $8.3 million prior year benefit due to lower than expected product returns and the sale of our Intrathecal Therapy business in the first quarter of 2017. Net sales of the Intrathecal Therapy business through the March 17, 2017 divestiture date were $8.0 million compared to $34.2 million for the nine months ended September 30, 2016. These decreases were partially offset by a $26.2 million or 3.0% increase in Acthar net sales and a $16.1 million or 4.4% increase in Inomax net sales compared with the nine months ended September 30, 2016. The Acthar net sales increase was primarily driven by favorable pricing. Inomax net sales continued to benefit from a favorable 2016 contracting cycle. In addition, overall net sales growth during the nine months ended September 29, 2017 was negatively impacted by the extra selling week during the nine months ended September 30, 2016.

Net sales for Specialty Brands by geography were as follows (dollars in millions):
 Nine Months Ended  
 September 29,
2017
 September 30,
2016
 Percentage
Change
U.S.$1,684.0
 $1,700.1
 (0.9)%
Europe, Middle East and Africa53.6
 52.8
 1.5
Other5.5
 4.5
 22.2
Net sales$1,743.1
 $1,757.4
 (0.8)

Net sales for Specialty Brands by key products were as follows (dollars in millions):


Nine Months Ended  Nine Months Ended  
September 29,
2017
 September 30,
2016
 Percentage ChangeSeptember 28,
2018
 September 29,
2017
 Percentage Change
Acthar$899.9
 $873.7
 3.0 %
H. P. Acthar Gel$827.1
 $899.9
 (8.1)%
Inomax379.6
 363.5
 4.4
404.0
 379.6
 6.4
Ofirmev224.5
 217.4
 3.3
254.7
 224.5
 13.5
Therakos immunotherapy157.7
 157.2
 0.3
Hemostasis products42.8
 42.5
 0.7
Therakos174.2
 157.7
 10.5
Amitiza (1)
119.2
 
 
BioVectra35.7
 36.4
 (1.9)
Other38.6
 103.1
 (62.6)29.4
 62.6
 (53.0)
Specialty Brands$1,743.1
 $1,757.4
 (0.8)$1,844.3
 $1,760.7
 4.7

(1)Amitiza consists of both product net sales and royalties. Refer to Note 3 to the unaudited condensed consolidated financial statements for further information on Amitiza's revenue.


Specialty Generics. Brands. Net sales for the nine months ended September 29, 2017 decreased $123.928, 2018 increased $83.6 million or 16.1%, to $643.7$1,844.3 million, compared with $767.6$1,760.7 million for the nine months ended September 30, 2016.29, 2017. The decreaseincrease in net sales was primarily driven by decreases of $46.5 million, $39.4 million and $36.7 million in hydrocodone related products, Other controlled substances and oxycodone related products, respectively. These decreases were due to increased competition and customer consolidation, which has resulted in downward pricing pressure. Other products increased by $12.8 million primarily attributable to a discrete shipment of peptides that generated net sales of $12.9$119.2 million from the newly acquired Amitiza product and an increase in the first nine months of 2017. In addition, overallOfirmev, Therakos and Inomax net sales growth duringcompared with the nine months ended September 29, 2017 was negatively impactedas Ofirmev and Therakos experienced increased demand and Inomax net sales continue to benefit from favorable contracting and consumption. These increases were partially offset by a $72.8 million or 8.1% decrease in H.P. Acthar Gel net sales driven by the extra selling week duringresidual impact of previously reported patient withdrawal issues, and a $33.2 million or 53.0% decrease in Other products compared with the nine months ended September 30, 2016.29, 2017. The decrease in Other products net sales is primarily attributable to a decrease of $31.3 million related to the sale of Recothrom during the first quarter of 2018, and the sale of our Intrathecal Therapy business during the first quarter of 2017, which up through the March 17, 2017 divestiture date contributed net sales of $8.0 million.

Net sales for Specialty Generics by geography were as follows (dollars in millions):


 Nine Months Ended  
 September 29,
2017
 September 30,
2016
 Percentage
Change
U.S.$513.7
 $655.2
 (21.6)%
Europe, Middle East and Africa80.1
 64.9
 23.4
Other49.9
 47.5
 5.1
Net sales$643.7
 $767.6
 (16.1)

Net sales for Specialty Generics by key products were as follows (dollars in millions):
 Nine Months Ended  
 September 29,
2017
 September 30,
2016
 Percentage Change
Hydrocodone (API) and hydrocodone-containing tablets$63.3
 $109.8
 (42.3)%
Oxycodone (API) and oxycodone-containing tablets60.6
 97.3
 (37.7)
Methylphenidate ER58.2
 72.3
 (19.5)
Other controlled substances319.0
 358.4
 (11.0)
Other products142.6
 129.8
 9.9
Specialty Generics$643.7
 $767.6
 (16.1)




Operating Income
Operating income by segment and as a percentage of segment net sales for the nine months ended September 29, 2017 and September 30, 2016 is shown in the following tablewere as follows (dollars in millions):
Nine Months EndedNine Months Ended
September 29, 2017 September 30, 2016September 28, 2018 September 29, 2017
Specialty Brands$865.7
 49.7% $897.1
 51.0%$794.0
 43.1% $851.8
 48.4%
Specialty Generics179.9
 27.9
 260.9
 34.0
Segment operating income1,045.6
 43.8
 1,158.0
 45.9
Unallocated amounts:              
Corporate and allocated expenses(163.9)   (125.2)  (81.9)   (95.0)  
Intangible asset amortization(523.0)   (526.7)  (544.8)   (508.4)  
Restructuring and related charges, net (1)
(35.7)   (34.0)  (101.4)   (28.4)  
Non-restructuring impairment
   (16.9)  
Total operating income$323.0
   $455.2
  $65.9
   $220.0
  
(1)Includes restructuring-related accelerated depreciation.


Specialty Brands. Operating income for the nine months ended September 29, 201728, 2018 decreased $31.4$57.8 million to $865.7$794.0 million, compared with $897.1$851.8 million for the nine months ended September 30, 2016.29, 2017. Operating margin decreased to 49.7%43.1% for the nine months ended September 28, 2018, compared with 48.4% for the nine months ended September 29, 2017, compared with 51.0% for the nine months ended September 30, 2016.2017. The decrease in operating income and margin was impactedprimarily due to an $82.4 million increase in R&D expenses over the comparable period and expense recognition of inventory fair value adjustments associated with Amitiza. These changes were partially offset by increasesa decrease of $11.0$25.6 million in royalty expense, $8.7 million in R&D expense and $8.2 million in inventory provision expenseSG&A expenses compared with the nine months ended September 30, 2016. Partially offsetting these increases was the $14.3 million increase in net sales,29, 2017 primarily attributabledue to Acthar which experienced favorable pricing and lower rebate expenses. In addition, SG&A expenses decreased by $21.8 million as a result of cost benefits gained from restructuring actions.actions, including lower employee compensation costs and stock compensation expenses, in addition to lower legal fees.
Specialty Generics. Operating income for the nine months ended September 29, 2017 decreased $81.0Corporate and allocated expenses. Corporate and allocated expenses were $81.9 million to $179.9 million, compared with $260.9and $95.0 million for the nine months ended September 30, 2016. Operating margin decreased to 27.9% for the28, 2018 and September 29, 2017, respectively. The nine months ended September 29, 2017, compared with 34.0% for the nine months ended September 30, 2016. The decrease in operating income and margin was impacted by the $123.928, 2018 included a $35.0 million decrease in net sales duefair value of the contingent consideration liability related to customer consolidationstannsoporfin and additional competitors that has led to price decreases, which resultedan $11.8 million reduction in a $129.5 million unfavorable gross profit impact. In addition, SG&A expenses decreased by $26.8 million as a result of cost benefits gained from restructuring actions.
Corporate and allocated expenses. Corporate and allocated expenses were $163.9 million and $125.2 million for the nine months ended September 29, 2017 and September 30, 2016, respectively.accrual associated with our Lower Passaic River, New Jersey environmental remediation liability. The nine months ended September 29, 2017 included a $69.7 million charge from the recognitionpre-tax gain of previously deferred losses on the settlement of obligations associated with the termination of six defined benefit pension plans and a $56.6 million pre-tax gain associated with the sale of our Intrathecal Therapy business. The remaining decrease of $25.6$22.9 million consisted of various factors,was primarily due to cost benefits gained from restructuring actions including higher facility expenses,lower stock compensation expense and professional fees;expenses, in addition to lower legal expenses; all of which wereare partially offset by lower employee compensation costs, advertising and promotions expenses, legalan increase in professional fees and pension expense following the settlement of our six defined benefit pension plans.acquisition-related costs.


Liquidity and Capital Resources
Significant factors driving our liquidity position include cash flows generated from operating activities, financing transactions, capital expenditures, cash paid in connection with acquisitions and license agreements and cash received as a result of our divestitures. We believe that our future cash from operations, borrowing capacity under our revolving credit facility and access to capital markets will provide adequate resources to fund our working capital needs, capital expenditures and strategic investments for the foreseeable future.
A summary of our cash flows from operating, investing and financing activities is provided in the following table (dollars in millions):


Nine Months EndedNine Months Ended
September 29,
2017
 September 30,
2016
September 28,
2018
 September 29,
2017
Net cash from:      
Operating activities$448.5
 $873.2
$481.1
 $448.5
Investing activities390.2
 (371.0)(451.2) 390.2
Financing activities(812.5) (792.8)(998.9) (812.5)
Effect of currency exchange rate changes on cash and cash equivalents2.7
 1.8
(0.9) 2.7
Net decrease in cash and cash equivalents$28.9
 $(288.8)$(969.9) $28.9







Operating Activities
Net cash provided by operating activities of $481.1 million for the nine months ended September 28, 2018, was primarily attributable to income from continuing operations of $31.9 million and income from discontinued operations of $79.5 million, adjusted for non-cash items of $389.1 million driven by depreciation and amortization of $597.0 million, partially offset by $232.7 million related to a reduction in our deferred income tax liabilities, and a $19.4 million outflow from net investment in working capital. Included within this change in working capital were a $20.1 million net cash outflow related to other assets and liabilities and a $59.0 million increase in accounts receivable, partially offset by a $43.1 million decrease in inventory and a $16.7 million net cash inflow related to income taxes.
Net cash provided by operating activities of $448.5 million for the nine months ended September 29, 2017 was primarily attributable to income from continuing operations as adjustedof $26.6 million and income from discontinued operations of $499.1 million partially offset by an adjustment for non-cash items offset byof $146.6 million, in addition to a $223.8 million outflow from net investment in working capital. Included within this change in working capital were cash payments of $102.0 million for the FTC settlement, a $61.3 million contribution to the terminated pension plans that were settled during the period,nine months ended September 29, 2017, a $34.7 million increase in accounts receivable and a $30.2 million decrease in accounts payable, and a $68.1 million net cash outflow related to income taxes. The divestiture of the Nuclear Imaging business and increased competition in Specialty Generics also contributed to the decrease compared with the nine months ended September 30, 2016.
Net cash provided by operating activities of $873.2 million for the nine months ended September 30, 2016, was primarily attributable to income from continuing operations, as adjusted for non-cash items, in addition to a $28.4 million inflow from net investment in working capital. The working capital inflow was primarily driven by a $11.6 million net cash inflow related to income taxes and a $53.5 million increase in cash provided by other assets and liabilities, partially offset by a $37.2 million increase in accounts receivable. The increase in other assets and liabilities was primarily driven by the timing of the payroll cycle and restructuring payments.
The aforementioned cash flows from operating activities include cash flows from the ongoing operations of the Specialty Generics Disposal Group and the Nuclear Imaging business that are included within discontinued operations. Subsequent to the completion of thisthe Nuclear Imaging transaction on January 27, 2017, we no longer generate cash flows from the operation of this business. See further discussion of our discontinued operations in Note 34 of the notes to
the unaudited condensed consolidated financial statements included within Item 1. Financial Statements of this Quarterly Report on Form 10-Q.statements.

Investing Activities
Net cash provided byused in investing activities was $390.2$451.2 million for the nine months ended September 29, 2017,28, 2018, compared with a $371.0$390.2 million net cash outflowinflow for the nine months ended September 30, 2016.29, 2017. The $761.2$841.4 million change primarily resulted from the receiptcash outflows related to the Sucampo Acquisition of $576.9$698.0 million. These cash outflows were partially offset by the inflow of $159.2 million in proceeds received, net of transaction costs, from the divestiture of a portion of the Hemostasis business, inclusive of the PreveLeak and Recothrom products during the nine months ended September 28, 2018; proceeds received of $154.0 million related to divestituresthe note receivable from the purchaser of the Intrathecal Therapy business which was sold during the nine months ended September 29, 2017; and a $25.5 million cash inflow related to the sale of the remaining portion of our investment in Mesoblast Limited during the nine months ended September 28, 2018. This is compared with $576.9 million of proceeds received from the divestiture of the Nuclear Imaging and Intrathecal Therapy businesses during the nine months ended September 29, 2017, with $559.6 million and $17.3 million associated with the sales of the Nuclear Imaging and Intrathecal businesses, respectively. This is compared with $3.0 million of proceeds received from the divestiture of discontinued operations during the nine months ended September 30, 2016. Additionally, there were $35.9 million cash outflows related to the InfaCare Acquisition during the nine months ended September 29, 2017, compared with $245.4 million during the nine months ended September 30, 2016 primarily associated with the Hemostasis Acquisition. These aforementioned increases in cash inflows were partially offset by acash outflows of $21.5 million cash outflow related to the investment in Mesoblast Limited that was made during the nine months ended September 29, 2017 coupled with2017. Additionally, there was a $17.4$58.0 million increasedecrease in capital expenditures, compared to the nine months ended September 30, 2016.29, 2017.
Under our term loan credit agreement, the proceeds from the sale of assets and businesses must be either reinvested into capital expenditures or business development activities within one year of the respective transaction or we are required to make repayments on our term loan.

Financing Activities
Net cash used in financing activities was $998.9 million for the nine months ended September 28, 2018, compared with $812.5 million for the nine months ended September 29, 2017, compared with $792.8 million for the nine months ended September 30, 2016.2017. The $19.7$186.4 million increase in cash outflows was attributable to a $60.2$558.7 million increase in shares repurchased and $12.7 milliondebt repayments, net of debt financing costsissuances, offset by a $380.3 million decrease in shares repurchased. The significant components of $55.2our current year debt repayments included $600.0 million in repayments of debt, net of issuances. Included in the repayments of debt during the nine months ended September 29, 2017, was therelated to our revolving credit facility, a $225.0 million repayment of $30.0the variable-rate term loan maturing in 2024, repayment of $366.0 million of assumed debt from the InfaCareSucampo Acquisition, which was repaid upon closea $300.0 million repayment of the acquisition. In addition, during the three months ended September 29, 2017, we drew $500.0 million on our revolving credit facilityfully matured unsecured fixed rate notes, and repaid the balance in full, which is reported onopen market debt repurchases that aggregated to a gross basis in our unaudited condensed consolidated statementstotal principal amount of cash flows.$33.0 million.
Under Irish law, we can only pay dividends and repurchase shares out of distributable reserves. In March 2017, the Irish High Court approved our petition to reduce share capital and increase distributable reserves. The petition requires us to complete certain administrative matters, which were completed prior to September 29, 2017.




Debt and Capitalization
At September 29, 2017,28, 2018, the total principal amount of debt was $5,911.3$6,260.1 million as compared with $6,237.6$6,806.8 million at December 30, 2016.29, 2017. The total principal amount of debt at September 29, 201728, 2018 was comprised of $3,855.4$3,522.5 million of fixed-rate instruments, $1,855.7$2,210.8 million of variable-rate term loans, $200.0$300.0 million of borrowings under our revolving credit facility, $225.0 million of borrowings under a variable-rate securitization program and $0.2$1.8 million of capital lease obligations.an interest-free loan. The variable-rate term loan interest rates are based on LIBOR, subject to a minimum LIBOR level of 0.75% with interest payments generally expected to be



payable every 90 days, and requires quarterly principal payments equal to 0.25% of the original principal amount. As of September 29, 2017,28, 2018, our fixed-rate instruments have a weighted-average interest rate of 5.29%5.45% and pay interest at various dates throughout the fiscal year. Our receivable securitization program bears interest based on one-month LIBOR plus a margin of 0.90% and has a capacity of $250.0 million that may, subject to certain conditions, be increased to $300.0 million. In addition to the borrowing capacity under our receivable securitization program, we had $600.0 million available under our $900.0 million revolving credit facility at September 28, 2018.
In November 2015, our Board of Directors authorized us to reduce our outstanding debt at our discretion. As market conditions warrant, we may from time to time repurchase debt securities issued by us, in the open market, in privately negotiated transactions, by tender offer or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements and other factors. The amounts involved may be material. During the nine months ended September 29, 2017,28, 2018, we repurchased debt that aggregated to a total principal amount of $66.9$33.0 million.
At September 29, 2017, $318.828, 2018, $17.0 million of our debt principal was classified as current, as these payments are expected to be made within the next twelve months.
In additionJanuary 2018, we made a $225.0 million prepayment on our outstanding term loan due September 2024.  In making this payment, we satisfied certain obligations included within external debt agreements to reinvest proceeds from the borrowing capacitysale of assets and businesses within one year of the respective transaction or use the proceeds to pay down debt.   
In February 2018, in conjunction with the Sucampo Acquisition, the Company entered into a $600.0 million senior secured term loan. The variable-rate loan bears an interest rate of LIBOR plus 300 basis points and was issued with a discount of 25 basis points. The incremental term loan matures on February 25, 2025 under our receivable securitization program, we haveterms generally consistent with the Company's existing term loan.
Upon completion of the Sucampo Acquisition, Sucampo's 3.25% convertible senior notes due 2021 ("the Sucampo Notes") became eligible to receive increased consideration in conjunction with a $900.0 million revolving credit facility. Atmake-whole fundamental change, such that each $1,000 principal face amount of Sucampo Notes could be converted into $1,221 in cash. As of September 29, 2017, we had no outstanding borrowings under our revolving credit facility. As such, there was $900.028, 2018, all $300.0 million of additional borrowing capacity under our revolving credit facility.the issued convertible debt was converted and paid in full.
In April 2018, $300.0 million of the 3.50% unsecured, fixed-rate notes matured and were repaid with cash on hand.
As of September 29, 2017,28, 2018, we were, and expect to remain, in full compliance with the provisions and covenants associated with our debt agreements.
On July 28, 2017,October 22, 2018, we entered into aborrowed an additional $25.0 million on our receivable securitization, bringing total outstanding borrowings to $250.0 million variable-rate securitization program with a three-year termfor this instrument as of the date of this report.
On October 23, 2018, we made an $80.0 million payment on the revolving credit facility, bringing total outstanding borrowings to replace$220.0 million for this instrument as of the $250.0 million variable-rate securitization program that expired in July 2017 and was therefore classified as long-term debt in the condensed consolidated balance sheet at September 29, 2017.date of this report.


Commitments and Contingencies
Legal Proceedings
We are 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 in Note 1617 of the notes to the unaudited condensed consolidated financial statements. We believe 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, we believe, unless otherwise indicated in Note 1617 of the notes to the unaudited condensed consolidated financial statements, given the information currently available, that their ultimate resolutions willare not expected to have a material adverse effect on our financial condition, results of operations and cash flows.


Guarantees
In disposing of assets or businesses, we have historicallyfrom time to time 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. We assess the probability of potential liabilities related to such representations, warranties and indemnities and adjust potential liabilities as a result of changes in facts and circumstances. We believe, given the information currently available, that their ultimate resolutions will not have a material adverse effect on our 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, we 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 date of



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 ourthe unaudited condensed consolidated balance sheetsheets as of September 28, 2018 and December 29, 2017 was $14.3 million and $14.9 million, respectively, of which $12.2$11.6 million and $12.1 million, respectively, related to environmental, health and safety matters. The value of the environmental, health and safety indemnity was measured based on the probability-weighted present value of the costs expected to be


incurred to address environmental, health and safety claims made under the indemnity. The aggregate fair value of these indemnification obligations did not differ significantly from their aggregate carrying value at September 28, 2018 and December 29, 2017. As of September 29, 2017,28, 2018, the maximum future payments we could be required to make under these indemnification obligations waswere $70.2 million. We were required to pay $30.0 million into an escrow account as collateral to the purchaser, of which $18.2$18.5 million and $18.3 million remained in restricted cash, included in long-term other assets on ourthe unaudited condensed consolidated balance sheetsheets at September 28, 2018 and December 29, 2017.2017, respectively.
We have recorded liabilities for known indemnification obligations included as part of environmental liabilities, which are discussed in Note 1617 of the unaudited notes to the unaudited condensed consolidated financial statements.
In addition, weWe are also liable for product performance, and have established accruals as necessary;performance; however, we believe, given the information currently available, that the ultimate resolution of these obligationsany such claims will not have a material adverse effect on our financial condition, results of operations and cash flows.


Off-Balance Sheet Arrangements
We were previously required to provide the U.S. Nuclear Regulatory Commission financial assurance demonstrating our ability to fund the decommissioning of our Maryland Heights, Missouri radiopharmaceuticals production facility upon closure. Following the sale of the Nuclear Imaging business, the surety bond was canceled in April 2017 and the Company is no longer required to provide financial assurance to the U.S. Nuclear Regulatory Commission. As of September 29, 2017,28, 2018, we had various other letters of credit, guarantees and surety bonds totaling $29.1$22.5 million.
We exchanged title to $16.0 million of There has been no change in our plant assets in return for an equal amount of Industrial Revenue Bonds ("IRB") issued by Saint Louis County. We also simultaneously leased such assets back from Saint Louis County under a capital lease expiring in December 2025,off-balance sheet arrangements during the terms of which provide us with the right of offset against the IRBs. The lease also provides an option for us to repurchase the assets at the end of the lease for nominal consideration. These transactions collectively result in a property tax abatement for ten years from the date the property was placed in service. Duenine months ended September 28, 2018. Refer to the right of offset, the capital lease obligations and IRB assets are recorded net, and therefore do not appear in the unaudited condensed consolidated balance sheets. We expect that the right of offset will be applied to payments required under these arrangements.
In addition, the separation and distribution agreement entered into with Covidien provides for cross-indemnities principally designed to place financial responsibility of the obligations and liabilities of our business with us and financial responsibilityCompany's Annual Report filed on Form 10-K for the obligations and liabilities of Covidien's remaining business with Covidien, among other indemnities.fiscal year ended December 29, 2017 for further detail on the Company's off-balance sheet arrangements.


Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S.GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities.
We believe that our accounting policies for revenue recognition, goodwill and other intangible assets, acquisitions, contingencies and income taxes are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. During the nine months ended September 29, 201728, 2018, there were no significant changes to these policies or in the underlying accounting assumptions and estimates used in the above critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year ended September 30, 2016.December 29, 2017.

Refer to Note 2 to the unaudited condensed consolidated financial statements for our adoption of ASU 2014-09, "Revenue from Contracts with Customers," and its related amendments, which did not result in a material change to the unaudited condensed consolidated financial statements.

Forward-Looking Statements
We have made forward-looking statements in this Quarterly Report on Form 10-Q that are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include, but are not limited to, information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements and the effects of competition, litigation and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "project," "anticipate," "estimate," "predict," "potential," "continue," "may," "should," “will,” “would,” “could”"will," "would," "could" or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any forward-looking statements.
The risk factors included within Item 1A. of our Annual Report on Form 10-K for the fiscal year ended September 30, 2016December 29, 2017 and within Part II, Item 1A of this Quarterly Report on Form 10-Q could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business.


These forward-looking statements are made as of the filing date of this Quarterly Report on Form 10-Q. We expressly disclaim any obligation to update these forward-looking statements other than as required by law.





Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Our operations include activities in the U.S. and countries outside of the U.S. These operations expose us to a variety of market risks, including the effects of changes in interest rates and currency exchange rates. We monitor and manage these financial exposures as an integral part of our overall risk management program. We do not utilize derivative instruments for trading or speculative purposes.


Interest Rate Risk
Our exposure to interest rate risk relates primarily to our variable-rate debt instruments, which bear interest based on LIBOR plus margin. As of September 29, 2017,28, 2018, our outstanding debt included $1,855.7$2,210.8 million variable-rate debt on our senior secured term loans, no$300.0 million outstanding borrowings on our senior unsecured revolving credit facility and $200.0$225.0 million variable-rate debt on our receivables securitization program. Assuming a one percent increase in the applicable interest rates, in excess of applicable minimum floors, quarterly interest expense would increase by approximately $5.1$6.8 million.
The remaining outstanding debt as of September 29, 201728, 2018 is fixed-rate debt. Changes in market interest rates generally affect the fair value of fixed-rate debt, but do not impact earnings or cash flows.



Currency Risk
Certain net sales and costs of our non-U.S. operations are denominated in the local currency of the respective countries. As such, profits from these subsidiaries may be impacted by fluctuations in the value of these local currencies relative to the U.S. Dollar.dollar. We also have significant intercompany financing arrangements that may result in gains and losses in our results of operations. In an effort to mitigate the impact of currency exchange rate effects we may hedge certain operational and intercompany transactions; however, our hedging strategies may not fully offset gains and losses recognized in our results of operations.
The unaudited condensed consolidated statement of income is significantly exposed to currency risk from intercompany financing arrangements, which primarily consist of intercompany debt and intercompany cash pooling, where the denominated currency of the transaction differs from the functional currency of one or more of our subsidiaries. We performed a sensitivity analysis for these arrangements as of September 29, 201728, 2018 that measures the potential unfavorable impact to income from continuing operations before income taxes from a hypothetical 10.0% adverse movement in foreign exchange rates relative to the U.S. Dollar,dollar, with all other variables held constant. There is an $0.8a $1.3 million aggregate potential unfavorable impact from a hypothetical 10.0% adverse change in foreign exchange rates as of September 29, 2017.28, 2018. This hypothetical loss does not reflect any hypothetical benefits that would be derived from hedging activities, including cash holdings in similar foreign currencies that we have historically utilized to mitigate our exposure to movements in foreign exchange rates.
The financial results of our non-U.S. operations are translated into U.S. Dollars,dollars, further exposing us to currency exchange rate fluctuations. We have performed a sensitivity analysis as of September 29, 201728, 2018 that measures the change in the net financial position arising from a hypothetical 10.0% adverse movement in the exchange rates of all foreign currencies used, including the Euro and the Canadian Dollar, our most widely used foreign currencies, relative to the U.S. Dollar,dollar, with all other variables held constant. The aggregate potential change in net financial position from a hypothetical 10.0% adverse change in the above currencies was $13.4$14.2 million as of September 29, 201728, 2018. The change in the net financial position associated with the translation of these currencies is generally recorded as an unrealized gain or loss on foreign currency translation within accumulated other comprehensive incomeloss in shareholders' equity of our unaudited condensed consolidated balance sheets.

Item 4.Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended ("the Exchange Act"), is recorded, processed, summarized and reported within the specified time periods, and that such information is accumulated and communicated to management, including our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly


Report on Form 10-Q. Based on that evaluation, our CEO and CFO concluded that, as of that date, our disclosure controls and procedures were effective.





Changes in Internal Control over Financial Reporting
There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.





PART II. OTHER INFORMATION
 
Item 1.Legal Proceedings.
We are 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 in Note 1617 of the unaudited notes to the unaudited condensed consolidated financial statements. We believe 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, we believe, unless otherwise indicated in Note 1617 of the unaudited notes to the unaudited condensed consolidated financial statements, given the information currently available, that their ultimate resolutions willare not expected to have a material adverse effect on our financial condition, results of operations and cash flows. For further information on pending legal proceedings, refer to Note 1617 of the notes to the unaudited condensed consolidated financial statements.

Item 1A.Risk Factors.
There have been no material changes to the risk factors previously disclosed in Part I, Item 1A. “Risk Factors”"Risk Factors" in our Annual Report on Form 10-K for the year ended September 30, 2016,December 29, 2017, filed with the SEC on November 29, 2016.February 27, 2018.


Item 2.Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Issuer Purchases of Securities
The following table summarizes the repurchase activity of our ordinary shares during the three months ended September 29, 201728, 2018. The repurchase activity presented below includes both market repurchases of shares and deemed repurchases in connection with the vesting of restricted share units under employee benefit plans to satisfy minimum statutory tax withholding obligations.
On November 19, 2015, the Company's Board of Directors authorized a $500.0 million share repurchase program (the “November 2015 Program”), which was completed in the three months ended December 30, 2016. On March 16, 2016, the Company's Board of Directors authorized an additional $350.0 million share repurchase program (the “March"March 2016 Program”Program") which was completed during the three months ended March 31, 2017. On March 1, 2017, the Company's Board of Directors authorized an additionala $1.0 billion share repurchase program (the "March 2017 Program") which commenced upon the completion of the March 2016 Program. The March 2017 Program has no time limit or expiration date, and the Company currently expects to fully utilize the program.
 Total Number of
Shares Purchased
 
Average Price
Paid
Per Share
 Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
 Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under Plans or Programs
July 1, 2017 to July 28, 20174,100
 $44.83
 
 $889.7
July 29, 2017 to August 25, 2017731,836
 37.82
 731,707
 862.0
August 26, 2017 to September 29, 2017785,312
 36.97
 785,312
 833.0
 Total Number of
Shares Purchased
 
Average Price
Paid
Per Share
 Total Number of
Shares Purchased
as Part of
Publicly
Announced Plans
or Programs
 Maximum Number (or Approximate Dollar Value) of Shares That May Yet Be Purchased Under Plans or Programs
June 30, 2018 to July 27, 201836,282
 $18.66
 
 $564.2
July 27, 2018 to August 31, 2018121
 22.87
 
 564.2
September 1, 2018 to September 28, 2018169
 34.62
 
 564.2


Item 3.Defaults Upon Senior Securities.
 None.
 




Item 4.Mine Safety Disclosures.
 Not applicable.


Item 5.Other Information.
 None.







Item 6.Exhibits.















SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 MALLINCKRODT PUBLIC LIMITED COMPANY
   
 By:/s/ Matthew K. Harbaugh
  
Matthew K. Harbaugh
Executive Vice President and Chief Financial Officer
(principal financial officer)






Date: November 7, 20176, 2018






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