Background and Basis of Presentation

6 Months Ended

Jun. 26, 2020

Organization, Consolidation and Presentation of Financial Statements [Abstract]


1.			Background and Basis of Presentation

Background

Mallinckrodt plc is a global business of multiple wholly owned subsidiaries (collectively, "Mallinckrodt" or "the Company") that develop, manufacture, market and distribute specialty pharmaceutical products and therapies. Areas of focus include autoimmune and rare diseases in specialty areas like neurology, rheumatology, nephrology, pulmonology and ophthalmology; immunotherapy and neonatal respiratory critical care therapies; analgesics and gastrointestinal products.

The Company operates in two reportable segments, which are further described below:

•Specialty Brands includes innovative specialty pharmaceutical brands; and

•Specialty Generics includes niche specialty generic drugs and active pharmaceutical ingredients ("API(s)").

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. dollars and in accordance with accounting principles generally accepted in the U.S. ("GAAP"). The preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses. Actual results may differ from those estimates. The unaudited condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and entities in which they own or control more than 50.0% 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 reported in discontinued operations. Divestitures of product lines and businesses not meeting the criteria for discontinued operations have been reflected in operating income.

The fiscal year end balance sheet data was derived from audited consolidated financial statements, but do not include all of the annual disclosures required by GAAP; accordingly these unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited annual consolidated financial statements included in its Annual Report on Form 10-K for the fiscal year ended December 27, 2019 filed with the U.S. Securities and Exchange Commission ("SEC") on February 26, 2020.

Going Concern

The accompanying unaudited condensed consolidated financial statements are prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business.

Management has identified the following negative conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date of issuance of the unaudited condensed consolidated financial statements:

•During the three months ended June 26, 2020, the Company changed the base date average manufacturer price ("AMP") for Acthar^® Gel ("Acthar Gel") in the Centers for Medicare & Medicaid Services ("CMS") data reporting system to reflect the original base date AMP for Acthar Gel. As a result, the Company recorded an accrual of $639.7 million related to this retrospective liability (the “Acthar Gel Medicaid Retrospective Rebate”) in the unaudited condensed consolidated balance sheet as of June 26, 2020. The Company continues to appeal the March 2020 adverse ruling by the court, which upheld CMS' decision to reverse its previous determination of the base date AMP used to calculate Acthar Gel rebates. See Note 11 for further information on this matter, described as the Medicaid Lawsuit. Barring other arrangements, the cash payments for this current liability will begin to come due in accordance with the normal rebate payment schedule before the end of 2020.

•As further described in Note 9 and within the notes to the financial statements included within the Company’s Annual Report filed on Form 10-K for the fiscal year ended December 27, 2019, the agreements governing the Company's debt contain various restrictive covenants, including, with respect to the Company's revolving credit facility, the financial covenant requiring the Company to maintain a net debt leverage ratio that does not exceed a specified threshold as of the last day of each fiscal quarter. In the event the Company is unable either to comply with this financial covenant, or to obtain a waiver from its revolving credit facility lenders, such lenders will have the right, but not the obligation, to declare all or any portion of the outstanding revolving credit facility balance due and payable. Furthermore, in the event that outstanding balances under the revolving credit facility are declared due and payable by the lenders, the lenders of certain of the Company's other debt will have the right, but not the obligation, to declare all of the outstanding balance of such debt due and payable as well.

As of June 26, 2020, the Company was fully drawn on its $900.0 million revolving credit facility. The Company was in compliance with the above-described financial covenant as of June 26, 2020. However, the Company expects that it would be unable to continue to comply with such financial covenant commencing in the first fiscal quarter of 2021 if it were to pay the Acthar Gel Medicaid Retrospective Rebate.

•As previously disclosed, on February 25, 2020, the Company announced an agreement in principle on the terms of a global settlement that would resolve all opioid-related claims against the Company and its subsidiaries (“Opioid-Related Litigation Settlement”), described more fully in Note 11. The Opioid-Related Litigation Settlement is subject to a number of conditions, which may not be satisfied. Among other things, the Opioid-Related Litigation Settlement included an unsatisfied condition with respect to the outcome of the Medicaid lawsuit. The Company is engaged in constructive dialogue with the plaintiff parties to the Opioid-Related Litigation Settlement to address the impact of the U.S. District Court for the District of Columbia (the "District Court")’s decision in regards to the Medicaid lawsuit, but there can be no assurance that such dialogue will result in a modification of the Opioid-Related Litigation Settlement that would be satisfactory to all parties. Moreover, the Opioid-Related Litigation Settlement contemplates a bankruptcy filing for Mallinckrodt’s Specialty Generics Subsidiaries (as defined in Note 11) only. If Mallinckrodt plc and most of its subsidiaries (and not only the Specialty Generics Subsidiaries) were to choose to pursue a Chapter 11 filing, the Company would expect to seek to modify the Opioid-Related Litigation Settlement so that it would be effectuated in the context of the related bankruptcy proceedings, but there likewise can be no assurance that the Company would be able to agree to a modification of the Opioid-Related Litigation Settlement that would be satisfactory to all parties. If the opioid-related claims are not settled, the Company would be subject to continued litigation with certain plaintiffs with opioid-related claims and the Company may become subject to some or all of the liabilities that would have otherwise been settled, which could have a material and adverse effect on the Company’s business, financial condition, results of operations and cash flows.

These conditions and events raise substantial doubt about the Company’s ability to continue as a going concern.

Any plans to resolve these risks as a going concern have not yet been finalized and are not fully within the Company's control, and therefore cannot be deemed probable. The Company has been working with external advisors to explore a range of options and engage in dialogue with financial creditors and litigation claimants and their advisors, which may result in a filing for reorganization in bankruptcy under Chapter 11 by Mallinckrodt plc and most of its subsidiaries in the near-term. As a result, the Company has concluded that management’s plans at this stage do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

The unaudited condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts and classification of liabilities that might result from the outcome of this uncertainty. See Note 4 for discussion regarding the valuation allowance of $341.6 million on the Company’s net deferred tax assets that was recorded within the unaudited condensed consolidated balance sheet as of June 26, 2020 as a result of considering the aforementioned substantial doubt in the Company’s assessment of the realizability of certain net deferred tax assets.

Fiscal Year

The Company reports its results based on a "52-53 week" year ending on the last Friday of December. Unless otherwise indicated, the three and six months ended June 26, 2020 refers to the thirteen and twenty-six week periods ended June 26, 2020 and the three and six months ended June 28, 2019 refers to the thirteen and twenty-six week periods ended June 28, 2019.