Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 29, 2023

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 29, 2023 (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	$	40.7	$	27.1	$	13.6	$	—
Equity securities	16.3		16.3		—		—
Interest rate cap	25.1		—		25.1		—
	$	82.1	$	43.4	$	38.7	$	—
Liabilities:
Deferred compensation liabilities	$	18.9	$	—	$	18.9	$	—
Contingent consideration liabilities	—		—		—		—
	$	18.9	$	—	$	18.9	$	—


	December 30, 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	$	36.6	$	24.8	$	11.8	$	—
Equity securities	25.5		25.5		—		—
	$	62.1	$	50.3	$	11.8	$	—
Liabilities:
Deferred compensation liabilities	$	26.0	$	—	$	26.0	$	—
Contingent consideration liabilities	7.3		—		—		7.3

	$	33.3	$	—	$	26.0	$	7.3

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.

Interest rate cap. The Company is exposed to interest rate risk on its variable-rate debt. During the three months ended March 31, 2023, the Company entered into an interest rate cap agreement, which serves to reduce the volatility on future interest expense cash outflows. The interest rate cap agreement has a total notional value of $860.0 million with an upfront premium of $20.0 million and provides the Company with interest rate protection (i) for the period March 16, 2023 through July 19, 2023 to the extent that the one-

month London Interbank Offered Rate ("LIBOR") exceeds 4.65%, and (ii) for the period July 20, 2023 through March 26, 2026 to the extent that the one-month SOFR exceeds 3.84%.

The interest rate cap agreement qualifies as a cash flow hedge. The premium paid is recognized in income on a rational basis, and changes in the fair value of the interest rate cap are recorded within accumulated other comprehensive income ("AOCI") and are subsequently reclassed into interest expense in the period when the hedged interest affects earnings. The fair value of the interest rate cap is included in other assets on the Company’s unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor). The Company elected to use the income approach to value the interest rate cap derivative using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount (discounted) reflecting current market expectations about those future amounts. Level 2 inputs for derivative valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts) and inputs other than quoted prices that are observable such as LIBOR or SOFR rate curves, futures and volatilities. Mid-market pricing is used as a practical expedient in the fair value measurements. During the three and nine months ended September 29, 2023 (Successor) the Company recognized an unrealized gain of $2.7 million and $8.8 million, respectively, within AOCI with a loss of $1.1 million and gain of $0.1 million, respectively, being reclassified into earnings as a component of interest expense, net. It is expected that over the next 12 months, $6.7 million of the estimated losses in AOCI will be recognized into interest expense, net. The cash payment of the $20.0 million premium and other corresponding activity related to the interest rate cap were reflected as cash flows from operating activities in the unaudited condensed consolidated statement of cash flows for the nine months ended September 29, 2023 (Successor).

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. In accordance with the 2020 Plan and the 2020 Scheme of Arrangement, the Company will provide consideration for a contingent value right associated with Terlivaz® ("Terlivaz CVR") 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 Terlivaz CVR as of September 29, 2023 (Successor) and December 30, 2022 (Successor) to be zero and $7.3 million, respectively. As a result of the 2023 Chapter 11 Cases, this liability was reclassified to LSTC on the unaudited condensed consolidated balance sheet as of September 29, 2023 (Successor).

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 29, 2023 (Successor) and December 30, 2022 (Successor):

•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 $62.2 million and $57.2 million as of September 29, 2023 (Successor) and December 30, 2022 (Successor) (level 1), respectively.

•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 $44.1 million and $46.7 million as of September 29, 2023 (Successor) and December 30, 2022 (Successor), respectively. These contracts are included in other assets on the unaudited condensed consolidated balance sheets.

•The Company's 10.00% and 11.50% first and second lien senior secured notes, DIP Financing and receivables financing facility 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.

The following table presents the carrying values and estimated fair values of the Company's debt as of the end of each period:


	Successor
	September 29, 2023				December 30, 2022
	Carrying Value		Fair Value		Carrying Value		Fair Value
Level 1:
Debtor-in-Possession Financing due November 2023	$	280.0	$	285.6	$	—	$	—
Receivables financing facility due December 2023	100.0		100.0		—		—
10.00% first lien senior secured notes due April 2025	495.0		393.0		475.9		425.9
10.00% second lien senior secured notes due April 2025	321.9		24.2		242.2		216.8
11.50% first lien senior secured notes due December 2028	650.0		574.1		650.0		552.6
10.00% second lien senior secured notes due June 2029	328.3		28.7		175.5		176.7

Level 2:
2017 Replacement Term loan due September 2027	1,356.7		1,025.2		1,222.1		1,037.8
2018 Replacement Term loan due September 2027	360.1		272.2		326.9		274.8
Total Debt	$	3,892.0	$	2,703.0	$	3,092.6	$	2,684.6

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
	Three Months Ended September 29, 2023		Three Months Ended September 30, 2022
FFF Enterprises, Inc.	24.0	%	26.1	%
AmerisourceBergen Corporation	13.3		*


	Successor				Predecessor
	Nine Months Ended September 29, 2023		Period from June 17, 2022 through September 30, 2022		Period from January 1, 2022 through June 16, 2022
FFF Enterprises, Inc.	22.4	%	25.7	%	11.8	%
CuraScript, Inc.	*		*		15.6

* 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
	September 29, 2023		December 30, 2022
AmerisourceBergen Corporation	31.3	%	23.3	%
McKesson Corporation	17.8		17.3
FFF Enterprises, Inc.	*		16.2

*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
	Three Months Ended September 29, 2023		Three Months Ended September 30, 2022
Acthar Gel	24.6	%	27.0	%
INOmax	14.7		17.3
Therakos	13.3		12.5
APAP	11.6		12.4


	Successor				Predecessor
	Nine Months Ended September 29, 2023		Period from June 17, 2022 through September 30, 2022		Period from January 1, 2022 through June 16, 2022
Acthar Gel	23.0	%	27.8	%	25.4	%
INOmax	16.6		17.1		19.0
Therakos	13.4		12.4		12.5
APAP	11.7		12.6		11.0

- 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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