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Financial Instruments and Fair Value Measurements

6 Months Ended

Jul. 01, 2022

Financial Instruments and Fair Value Measurements


14.			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:


	July 1, 2022 (Successor)		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	$	33.5	$	22.0	$	11.5	$	—
Equity securities	22.2		22.2		—		—
	$	55.7	$	44.2	$	11.5	$	—
Liabilities:
Deferred compensation liabilities	$	24.9	$	—	$	24.9	$	—
Contingent consideration liabilities	6.8		—		—		6.8


	$	31.7	$	—	$	24.9	$	6.8


	December 31, 2021 (Predecessor)		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	$	38.7	$	24.9	$	13.8	$	—
Equity securities	36.5		36.5		—		—
	$	75.2	$	61.4	$	13.8	$	—
Liabilities:
Deferred compensation liabilities	$	36.9	$	—	$	36.9	$	—
Contingent consideration liabilities	27.3		—		—		27.3

	$	64.2	$	—	$	36.9	$	27.3

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 and Panbela Therapeutics, Inc. for which quoted prices are available in an active market; therefore, these investments are classified as level 1 and are valued based on quoted market prices reported on internationally recognized securities exchanges.

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.

Successor contingent consideration liabilities. In accordance with the Plan and Scheme of Arrangement, the Company will provide consideration for a CVR associated with terlipressin primarily in the form of the achievement of a cumulative net sales milestone. The Company assesses the likelihood and timing of making such payments at each balance sheet date. The fair value of the contingent payment was measured based on the net present value of a probability-weighted assessment. The Company determined the fair value of the terlipressin CVR to be $6.8 million as of July 1, 2022 (Successor).

Predecessor contingent consideration liabilities. As part of the acquisition of 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 was responsible for a payment upon acceptance of the Company's submission and another upon approval by the FDA. The Company determined the fair value of the contingent consideration associated with the acquisition of Stratatech to be $27.3 million as of December 31, 2021 (Predecessor). These liabilities were governed by a contract and recorded at their estimated allowed claim amount within LSTC in the

unaudited condensed consolidated balance sheet as of December 31, 2021 (Predecessor). The contract governing this liability was rejected and the liability was discharged pursuant to the Plan on the Effective Date. Refer to Note 13 for further information.

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 July 1, 2022 (Successor) and December 31, 2021 (Predecessor):

•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 $136.5 million and $60.2 million as of July 1, 2022 (Successor) and December 31, 2021 (Predecessor) (level 1), respectively. Included within the balance as of July 1, 2022 was $76.1 million related to the funding of a professional fee escrow account upon emergence from Chapter 11. Refer to Note 3 for further information.

•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 $48.7 million and $51.3 million as of July 1, 2022 (Successor) and December 31, 2021 (Predecessor), respectively. These contracts are included in other assets on the unaudited condensed consolidated balance sheets.

•Successor debt. The Company's Existing 1L Notes, New 2L Notes, New 1L Notes and Takeback 2L Notes are classified as level 1, as quoted prices are available in an active market for these notes. Since quoted market prices for the Company's term loans are not available in an active market, they are classified as level 2 for purposes of developing an estimate of fair value.

Predecessor debt. The carrying value of the Company's former revolving credit facility approximated the fair value due to the short-term nature of this instrument, and was therefore classified as level 1. The Company's former 5.75%, 4.75%, 5.625%, 5.50% senior notes and 10.00% first and second lien senior secured notes were classified as level 1, as quoted prices were available in an active market for these notes. Since the quoted market prices for the Company's former term loans and former 9.50% and 8.00% debentures were not available in an active market, they were 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:


	Successor				Predecessor
	July 1, 2022				December 31, 2021
	Carrying Value		Fair Value		Carrying Value		Fair Value
Level 1:
10.00% first lien senior secured notes due April 2025	$	471.9	$	474.0	$	495.0	$	523.7
10.00% second lien senior secured notes due April 2025	228.4		237.5		—		—

11.50% first lien senior secured notes due December 2028	650.0		636.8		—		—
10.00% second lien senior secured notes due June 2029	190.9		254.2		—		—
Revolving credit facility due February 2022	—		—		900.0		900.0
5.75% senior notes due August 2022	—		—		610.3		324.1
4.75% senior notes due April 2023	—		—		133.7		48.9
5.625% senior notes due October 2023	—		—		514.7		279.1
10.00% second lien senior secured notes due April 2025	—		—		322.9		312.7
5.50% senior notes due April 2025	—		—		387.2		211.6

Level 2:
Replacement term loan due September 2027	1,223.4		1,189.5		—		—
Replacement term loan due September 2027	327.5		317.3		—		—
9.50% debentures due May 2022	—		—		10.4		7.7
8.00% debentures due March 2023	—		—		4.4		3.2
Term loan due September 2024	—		—		1,396.5		1,309.2
Term loan due February 2025	—		—		370.7		347.7
Total Debt	$	3,092.1	$	3,109.3	$	5,145.8	$	4,267.9

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:

Successor

Predecessor

Period from
June 17, 2022
through
July 1, 2022

Period from
April 2, 2022
through
June 16, 2022

Three Months Ended June 25, 2021

FFF Enterprises, Inc.

23.6

26.9

* %

CuraScript, Inc.

23.7


	Successor		Predecessor
	Period from June 17, 2022 through July 1, 2022		Period from January 1, 2022 through June 16, 2022		Six Months Ended June 25, 2021
FFF Enterprises, Inc.	23.6	%	11.8	%	* %
CuraScript, Inc.	*		15.6		24.4

* Net sales to this distributor was less than 10.0% of the Company's total net sales for 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:


	Successor		Predecessor
	July 1, 2022		December 31, 2021
AmerisourceBergen Corporation	29.7	%	30.0	%
McKesson Corporation	16.8		15.0
FFF Enterprises, Inc.	12.2		*
CuraScript, Inc.	*		12.7

*Accounts receivable attributable to this distributor was less than 10.0% of total gross accounts receivable at the end of the respective period presented above.

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


	Successor		Predecessor

	Period from June 17, 2022 through July 1, 2022		Period from April 2, 2022 through June 16, 2022		Three Months Ended June 25, 2021
Acthar Gel	32.4	%	24.6	%	27.7	%
INOmax	15.8		17.4		19.4

Therakos	12.0		13.0		12.5
APAP	13.3		13.1		*


	Successor		Predecessor
	Period from June 17, 2022 through July 1, 2022		Period from January 1, 2022 through June 16, 2022		Six Months Ended June 25, 2021
Acthar Gel	32.4	%	25.4	%	25.4	%
INOmax	15.8		19.0		21.7

Therakos	12.0		12.5		12.3
APAP	13.3		11.0		*

*Net sales attributable to this product was less than 10.0% of total net sales for the respective periods presented above.

- 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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