

17.	Financial Instruments and Fair Value Measurements

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

Level 1— observable inputs such as quoted prices in active markets for identical assets or liabilities;

Level 2— significant other observable inputs that are observable either directly or indirectly; and

Level 3— significant unobservable inputs in which there is little or no market data, which requires the Company to develop its own assumptions.

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



	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 contracts	0.7		0.7		—		—
	$	34.3	$	23.5	$	10.8	$	—

Liabilities:
Deferred compensation liabilities	$	32.5	$	—	$	32.5	$	—
Contingent consideration and acquired contingent liabilities	250.5		—		—		250.5
Foreign exchange forward and option contracts	3.4		3.4		—		—
	$	286.4	$	3.4	$	32.5	$	250.5



	September 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	$	34.6	$	23.1	$	11.5	$	—
Foreign exchange forward and option contracts	0.2		0.2		—		—
	$	34.8	$	23.3	$	11.5	$	—

Liabilities:
Deferred compensation liabilities	$	26.8	$	—	$	26.8	$	—
Contingent consideration and acquired contingent liabilities	247.8		—		—		247.8
Foreign exchange forward and option contracts	1.6		1.6		—		—
	$	276.2	$	1.6	$	26.8	$	247.8

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.

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 and CNS Therapeutics.

During the three months ended December 30, 2016, the Company reduced the probability-weighted present value associated with the achievement of the CNS Therapeutics contingent consideration, due to delays in the anticipated timing of FDA approval of a certain concentration of Gablofen, and recorded a reversal of the contingent consideration liability of $0.9 million within selling, general and administrative expenses. At December 30, 2016 and September 30, 2016, the fair value of the CNS Therapeutics contingent consideration was zero and $0.9 million, respectively.

The remaining contingent liability associated with the acquisition of Questcor, Inc. pertains the Company's license agreement with Novartis AG and Novartis Pharma AG (collectively "Novartis") related to the developmental product MNK-1141. At December 30, 2016, the total remaining payments under the license agreement shall not exceed $165.0 million. At December 30, 2016 and September 30, 2016, the fair value of the MNK-1141 contingent liability was $124.7 million and $123.4 million, respectively.

During the three months ended December 25, 2015, the Company paid the remaining obligation of $40.0 million CAD associated with contingent consideration obligations for BioVectra.

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 model to be $58.9 million and $11.2 million, respectively, at December 30, 2016. The fair value of the contingent consideration and acquired contingent liabilities based on an option pricing model were $57.7 million and $11.0 million, respectively, as of September 30, 2016.

As part of the Stratatech Acquisition, the Company provided contingent consideration to the Stratatech Corporation, 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 Company determined the fair value of the contingent consideration associated with the Stratatech Acquisition to be $55.7 million and $54.9 million at December 30, 2016 and September 30, 2016, respectively.

The following table provides a summary of the changes in the Company's contingent consideration and acquired contingent liabilities:



Balance at September 30, 2016	$	247.8
Accretion expense	1.4
Fair value adjustment	1.3
Balance at December 30, 2016	$	250.5

Financial Instruments Not Measured at Fair Value

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and the majority of other current assets and liabilities approximate fair value because of their short-term nature. The Company classifies cash on hand and deposits in banks, including commercial paper, money market accounts and other investments it may hold from time to time, with an original maturity of three months or less, as cash and cash equivalents (level 1). The fair value of restricted cash was equivalent to its carrying value of $19.1 million as of December 30, 2016 and September 30, 2016, respectively (level 1), which was included in prepaid expenses and other current assets and other assets on the unaudited condensed consolidated balance sheets. The Company entered into short-term investment certificates during the three months ended December 30, 2016. These certificates are carried at cost, which approximates fair value, of $11.1 million at December 30, 2016 (level 2). These certificates are included in prepaid expenses and other current assets on the unaudited condensed consolidating 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 $67.6 million at December 30, 2016 and September 30, 2016, 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. 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:



	December 30, 2016				September 30, 2016
	Carrying Value		Fair Value		Carrying Value		Fair Value
Variable-rate receivable securitization	$	250.0	$	250.0	$	235.0	$	235.0
3.50% notes due April 2018	300.0		298.7		300.0		299.6
4.875% notes due April 2020	700.0		699.5		700.0		712.4
Term loans due March 2021	1,948.5		1,953.2		1,953.5		1,951.8
4.00% term loan due February 2022	6.5		6.5		7.1		7.1
9.50% debentures due May 2022	10.4		12.0		10.4		12.1
5.75% notes due August 2022	884.0		850.3		884.0		869.3
8.00% debentures due March 2023	4.4		4.9		4.4		4.9
4.75% notes due April 2023	600.0		520.9		600.0		539.5
5.625% notes due October 2023	738.0		682.4		740.0		710.2
5.50% notes due April 2025	695.0		615.7		700.0		663.6
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% or more of the Company's total net sales:



	Three Months Ended
	December 30, 2016		December 25, 2015
CuraScript, Inc.	43	%	39	%
McKesson Corporation	10	%	16	%

The following table shows accounts receivable attributable to distributors that accounted for 10% or more of the Company's gross accounts receivable at the end of each period:



	December 30, 2016		September 30, 2016
McKesson Corporation	28	%	30	%
Amerisource Bergen Corporation	15	%	15	%
CuraScript, Inc.	15	%	14	%
Cardinal Health, Inc.	10	%	10	%

The following table shows net sales attributable to products that accounted for 10% or more of the Company's total net sales:



	Three Months Ended
	December 30, 2016		December 25, 2015
Acthar	39	%	35	%
Inomax	14	%	14	%