Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 27, 2019

Fair Value Disclosures [Abstract]

Financial Instruments and Fair Value Measurements

16. 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 27, 2019		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Debt and equity securities held in rabbi trusts	$	35.7	$	25.9	$	9.8	$	—
Equity securities	11.4		11.4		—		—
	$	47.1	$	37.3	$	9.8	$	—
Liabilities:
Deferred compensation liabilities	$	37.3	$	—	$	37.3	$	—
Contingent consideration and acquired contingent liabilities	105.4		—		—		105.4
	$	142.7	$	—	$	37.3	$	105.4

	December 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	$	33.1	$	22.4	$	10.7	$	—
Liabilities:
Deferred compensation liabilities	$	38.5	$	—	$	38.5	$	—
Contingent consideration and acquired contingent liabilities	151.4		—		—		151.4
	$	189.9	$	—	$	38.5	$	151.4

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 Silence, 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 an internationally recognized securities exchange.

In July 2019, the Company remitted $5.0 million of consideration to Silence in exchange for equity shares. As part of this equity investment, the Company took a non-executive Director seat on the Silence Board of Directors. The Company's investment in Silence qualifies for equity method accounting given its ability to exercise significant influence; however, the Company elected the fair value method to account for its investment in Silence.

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, Stratatech Corporation ("Stratatech"), and 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 Synacthen, otherwise known as the Company's development product MNK-1411. Under the terms of this agreement, the Company paid the required annual payment of $25.0 million during the nine months ended September 27, 2019. The fair value of the remaining contingent payments was measured based on the net present value of a probability-weighted assessment. As of September 27, 2019, the total remaining payments under the license agreement shall not exceed $90.0 million. The Company determined the fair value of the contingent consideration associated with the acquisition of Questcor to be $53.7 million and $76.2 million as of September 27, 2019 and December 28, 2018, respectively.

As part of the Stratatech acquisition, 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 StrataGraft^®. The Company assesses the likelihood 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 Stratatech acquisition to be $35.1 million and $53.7 million as of September 27, 2019 and December 28, 2018, respectively.

As part of the Ocera acquisition, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones for intravenous ("IV") and oral formulations of MNK-6105 and MNK-6106, which represent the 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 $16.6 million and $21.5 million as of September 27, 2019 and December 28, 2018, respectively.

Of the total fair value of the contingent consideration of $105.4 million, $48.2 million was classified as current and $57.2 million was classified as non-current in the unaudited condensed consolidated balance sheet as of September 27, 2019. The following table summarizes the activity for contingent consideration:

Balance as of December 28, 2018	$	151.4
Payments	(25.0		)
Accretion expense	2.5
Fair value adjustments	(23.5		)
Balance as of September 27, 2019	$	105.4

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 27, 2019 and December 28, 2018:

• 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 $28.0 million and $18.6 million as of September 27, 2019 and December 28, 2018, (level 1), respectively, which was included in other assets on the unaudited condensed consolidated balance sheets.

• The Company received a portion of consideration as part of contingent earn-out payments related to the sale of the Nuclear Imaging business in the form of preferred equity certificates during both the nine months ended September 27, 2019 and September 28, 2018. These securities are classified as held-to-maturity and are carried at amortized cost, which approximates fair value (level 3), of $18.9 million and $9.0 million as of September 27, 2019 and December 28, 2018, respectively. These securities 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 $66.8 million and $66.4 million as of September 27, 2019 and December 28, 2018, 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 approximates fair value due to the short-term nature of this instrument, and is therefore classified as level 1. The Company's 4.875%, 5.75%, 4.75%, 5.625% and 5.50% Senior 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 following table presents the carrying values and estimated fair values of the Company's debt as of the end of each period:

	September 27, 2019				December 28, 2018
	Carrying Value		Fair Value		Carrying Value		Fair Value
Level 1:
4.875% Senior Notes due April 2020	$	698.0	$	457.9	$	700.0	$	676.6
Variable-rate receivable securitization due July 2020	—		—		250.0		250.0
5.75% Senior Notes due August 2022	663.2		250.3		835.2		713.6
4.75% Senior Notes due April 2023	350.1		99.8		500.2		336.7
5.625% Senior Notes due October 2023	659.4		217.9		731.4		557.0
5.50% Senior Notes due April 2025	596.1		179.2		692.1		479.1
Revolving credit facility	900.0		900.0		220.0		220.0
Level 2:
9.50% debentures due May 2022	10.4		5.1		10.4		9.7
8.00% debentures due March 2023	4.4		1.6		4.4		3.8
Term loan due September 2024	1,524.7		1,136.9		1,613.8		1,472.4
Term loan due February 2025	404.6		300.9		597.0		548.0
Level 3:
Other	—		—		2.2		2.2
Total debt	$	5,810.9	$	3,549.6	$	6,156.7	$	5,269.1

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 generally does not 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 10.0% or more of the Company's total net sales:

	Three Months Ended				Nine Months Ended
	September 27, 2019		September 28, 2018		September 27, 2019		September 28, 2018
CuraScript, Inc.	31.1	%	35.9	%	30.2	%	35.7	%
AmerisourceBergen Corporation	*		12.3	%	*		*

*Net sales to this distributor were less than 10% of total net sales during the respective periods presented above.

The following table shows accounts receivable attributable to distributors that accounted for 10.0% or more of the Company's gross accounts receivable at the end of each period:

	September 27, 2019		December 28, 2018
AmerisourceBergen Corporation	27.6	%	25.7	%
McKesson Corporation	14.1	%	21.9	%
CuraScript, Inc.	10.3	%	13.1	%

The following table shows net sales attributable to products that accounted for 10.0% or more of the Company's total net sales:

	Three Months Ended				Nine Months Ended
	September 27, 2019		September 28, 2018		September 27, 2019		September 28, 2018
Acthar Gel	30.9	%	36.3	%	30.5	%	34.7	%
Inomax	18.4	%	16.7	%	18.1	%	17.0	%
Ofirmev	11.6	%	10.9	%	11.5	%	10.7	%