

3.	Revenue from Contracts with Customers

Product Sales Revenue

The Company sells its products through distributors who resell the products to institutions and end user customers, while certain products are sold and distributed directly to hospitals. The Company also enters into arrangements with indirect customers, such as health care providers and payers, to establish contract pricing for certain products that provides for government-mandated and/or privately-negotiated rebates, chargebacks and discounts with respect to the purchase of the Company’s products.

Reserves for Variable Consideration

Revenues from 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 which is included in the transaction price may be constrained (reduced), and is included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. The Company adjusts reserves for chargebacks, rebates, product returns and other sales deductions to reflect differences between estimated and actual experience. Such adjustments impact the amount of net sales recognized in the period of adjustment.

The following table reflects activity in the Company’s sales reserve accounts, on a continuing operations basis:



	Rebates and Chargebacks			Product Returns			Other Sales Deductions			Total
Balance at December 29, 2017	$	60.3		$	4.1		$	1.1		$	65.5
Provisions	76.0			2.3			2.7			81.0
Payments or credits	(66.5		)	(2.9		)	(2.6		)	(72.0		)
Balance at March 30, 2018	$	69.8		$	3.5		$	1.2		$	74.5

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

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


•	For those contracts whereby revenue is recognized over time based upon consumption of the product, the Company either has:


1)	the right to invoice the customer in an amount that directly corresponds with the value to the customer of the Company's performance to date, for which the practical expedient to recognize revenue in proportion to the amount it has the right to invoice has been applied, or


2)	the remaining goods and services to which the customer is entitled is diminished upon consumption.

•

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

Revenue from product sales transferred to customers at a point in time and over time accounted for 75.3% and 24.7%, respectively, for the three month period ended March 30, 2018.

Transaction price allocated to the remaining performance obligations

The majority of the Company’s contracts (as defined under ASC 606) are less than one year; therefore, the related disclosure of the amount of transaction price allocated to the performance obligations that are unsatisfied at period end has been omitted, with the exception of those noted below. The following table includes estimated revenue from certain of the Company’s hospital products that are expected to be recognized in the future related to performance obligations that are unsatisfied or partially unsatisfied at March 30, 2018:



Remainder of 2018	$	93.3
2019	101.2
2020	81.1
2021	7.4

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 selling, general and administrative 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 hospital drug-device combination products which are used in satisfying future performance obligations. Capital expenditures for these devices represent cash outflows for the Company’s cost to produce the asset, which is classified in property, plant and equipment, net on the unaudited condensed consolidated balance sheet and expensed to cost of sales over the useful life of the equipment. As of March 30, 2018, the total net book value of these devices was $16.9 million. The associated depreciation expense recognized during the three months ended March 30, 2018 was $1.6 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 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 months ended March 30, 2018 was $8.0 million.

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 as presented on the unaudited condensed consolidated balance sheet as costs to obtain a contract are expensed when incurred as the amortization period would have been less than one year. These costs are recorded within selling, general and administrative expenses.

Contract liabilities are recorded when cash payments are received in advance of the Company’s performance, including amounts which are refundable. Contract liabilities were $18.8 million as of March 30, 2018 with $13.1 million included in accrued and other current liabilities and $5.7 million included in other liabilities on the unaudited condensed consolidated balance sheet. Contract liabilities were $20.2 million as of December 29, 2017 with $13.9 million included in accrued and other current liabilities and $6.3 million included in other liabilities on the unaudited condensed consolidated balance sheet. Revenue recognized during the three months ended March 30, 2018 from amounts included in contract liabilities at the beginning of the period was approximately $8.8 million.