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Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 24, 2021

Financial Instruments and Fair Value Measurements


13.			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 24, 2021		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	$	37.9	$	23.7	$	14.2	$	—
Equity securities	37.3		37.3		—		—
	$	75.2	$	61.0	$	14.2	$	—
Liabilities:
Deferred compensation liabilities	$	35.9	$	—	$	35.9	$	—
Contingent consideration and acquired contingent liabilities	27.1		—		—		27.1


	$	63.0	$	—	$	35.9	$	27.1


	December 25, 2020		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	$	33.0	$	23.5	$	9.5	$	—
Equity securities	31.1		31.1		—		—
	$	64.1	$	54.6	$	9.5	$	—
Liabilities:
Deferred compensation liabilities	$	38.0	$	—	$	38.0	$	—
Contingent consideration and acquired contingent liabilities	34.7		—		—		34.7

	$	72.7	$	—	$	38.0	$	34.7

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 Therapeutics plc ("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.

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 liabilities. As part of the acquisition of Stratatech Corporation ("Stratatech"), 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. For each indication, the Company is responsible for a payment upon acceptance of the Company's submission and another upon approval by the FDA. The Company assesses the likelihood and timing of making such payments at each balance sheet date. 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 to be $27.1 million and $19.1 million as of September 24, 2021 and December 25, 2020, respectively.

As part of the acquisition of Ocera, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones and sales-based milestones associated with MNK-6105 and MNK-6106. During the three months ended March 26, 2021, the Company determined it will no longer pursue further development of this asset. The Company determined the fair value of the contingent consideration based on an option pricing model to be zero and $15.6 million as of September 24, 2021 and December 25, 2020, respectively.

Contingent consideration liabilities were classified as LSTC in the unaudited condensed consolidated balance sheet as of September 24, 2021. The following table summarizes the activity for contingent consideration:


Balance as of December 25, 2020	$	34.7


Fair value adjustments	(7.6)
Balance as of September 24, 2021	$	27.1

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 24, 2021 and December 25, 2020:

•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 $59.6 million and $56.4 million as of September 24, 2021 and December 25, 2020 (level 1), respectively. As of September 24, 2021, $23.3 million and $36.3 million of the restricted cash balance was included in prepaid and other current assets and other assets, respectively, on the unaudited condensed consolidated balance sheet. As of December 25, 2020, $20.2 million and $36.2 million of the restricted cash balance was included in prepaid and other current assets and other assets, respectively, on the consolidated balance sheet.

•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 $51.0 million and $52.3 million as of September 24, 2021 and December 25, 2020, 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 the 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%, 5.50% and 10.00% first and second lien 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 24, 2021				December 25, 2020
	Carrying Value		Fair Value		Carrying Value		Fair Value
Level 1:

5.75% senior notes due August 2022	$	610.3	$	353.1	$	610.3	$	191.2
4.75% senior notes due April 2023	133.7		49.7		133.7		11.1
5.625% senior notes due October 2023	514.7		302.9		514.7		158.9
5.50% senior notes due April 2025	387.2		226.9		387.2		115.4
10.00% first lien senior notes due April 2025	495.0		539.5		495.0		528.4
10.00% second lien senior notes due April 2025	322.9		322.1		322.9		279.0
Revolving credit facility	900.0		900.0		900.0		900.0
Level 2:
9.50% debentures due May 2022	10.4		7.7		10.4		4.2
8.00% debentures due March 2023	4.4		3.2		4.4		1.3
Term loan due September 2024	1,403.9		1,351.5		1,505.2		1,386.9
Term loan due February 2025	372.6		357.7		399.5		367.9
Total Debt	$	5,155.1	$	4,414.3	$	5,283.3	$	3,944.3

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 segment net sales. which excludes the one-time charge incurred during the three and nine months ended September 25, 2020 related to the Medicaid lawsuit:


	Three Months Ended				Nine Months Ended
	September 24, 2021		September 25, 2020		September 24, 2021		September 25, 2020
CuraScript, Inc.	27.0	%	28.1	%	25.2	%	27.7	%

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 24, 2021		December 25, 2020
AmerisourceBergen Corporation	37.1	%	33.6	%
McKesson Corporation	16.2		18.2

The following table shows net sales attributable to products that accounted for 10.0% or more of the Company's total segment net sales, which excludes the one-time charge incurred during the three and nine months ended September 25, 2020 related to the Medicaid lawsuit:


	Three Months Ended				Nine Months Ended
	September 24, 2021		September 25, 2020		September 24, 2021		September 25, 2020
Acthar Gel	28.3	%	27.9	%	26.3	%	27.9	%
INOmax	19.4		20.3		21.0		21.2
Ofirmev	*		12.7		*		10.5
Therakos	12.3		*		12.3		*

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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