MALLINCKRODT The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and the accompanying notes included in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the fiscal year endedDecember 25, 2020 , filed withthe United States ("U.S.")Securities and Exchange Commission ("SEC") onMarch 10, 2021 and within Part II, Item 1A of this Quarterly Report on Form 10-Q. We own or have rights to use the trademarks and trade names that we use in conjunction with the operation of our business. One of the more important trademarks that we own or have 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 theU.S. and other jurisdictions. Solely for convenience, we only use the ™ or ® symbols the first time any trademark or trade name is mentioned in the following discussion. Such references are not intended to indicate in any way that we will not assert, to the fullest extent permitted under applicable law, our rights to our trademarks and trade names. Each trademark or trade name of any other company appearing in the following discussion is, to our knowledge, owned by such other company.
Overview
We are a global business consisting of multiple wholly owned subsidiaries 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.
We operate our business 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)").
For further information on our business and products, refer to our Annual Report
on Form 10-K for the fiscal year ended December 25, 2020 , filed with the U.S.
SEC on March 10, 2021 .
Significant Events
Voluntary Petitions for Reorganization
On October 12, 2020 (the "Petition Date"), we voluntarily initiated Chapter 11
proceedings (the "Chapter 11 Cases") under chapter 11 of title 11 ("Chapter 11")
of the United States Code (the "Bankruptcy Code") in the U.S. Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court ") to modify our capital
structure, including restructuring portions of our debt, and resolve otherwise
unmanageable potential legal liabilities. We are continuing to operate and
supply customers and patients with products as normal.
We intend to use the Chapter 11 process to provide a fair, orderly, efficient
and legally binding mechanism to implement a restructuring support agreement
("RSA") pursuant to which, among other things, the parties thereto have agreed
to support:
•A financial restructuring that would, among other things, reduce our total debt
by approximately $1,300.0 million , improving our financial position and better
positioning us for long-term growth;
•A proposed resolution of all opioid-related claims against us (the "Amended
Proposed Opioid-Related Litigation Settlement"); and
•A proposed resolution of various Acthar® Gel ("Acthar Gel")-related matters,
including the Medicaid lawsuit, an associated False Claims Act ("FCA") lawsuit
and an FCA lawsuit relating to Acthar Gel's previous owner's interactions with
an independent charitable foundation (the "Acthar Gel-Related Settlement").
Taken together, these actions are intended to enable us to move forward with our
vision to become an innovation-driven biopharmaceutical company meeting the
needs of underserved patients with severe and critical conditions.
For further information, refer to Note 2 of the notes to the unaudited condensed
consolidated financial statements.
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Reorganization items, net
Reorganization items, net, represent amounts incurred after the Petition Date as
a direct result of the Chapter 11 Cases and are comprised of bankruptcy-related
professional fees and adjustments to reflect the carrying value of liabilities
subject to compromise at their estimated allowed claim amounts, as such
adjustments are approved by the Bankruptcy Court . During the three months ended
March 26, 2021 , we incurred $93.5 million of reorganization items, net, of which
$77.7 million and $15.8 million related to professional fees and carrying value
adjustments, respectively. During the three months ended March 27, 2020 , we
incurred $22.5 million and $21.3 million in opioid defense costs and separation
costs, respectively, which were both included within selling general and
administrative ("SG&A") expenses. As of the Petition Date, the majority of these
costs are being classified on a go-forward basis as reorganization items, net,
as they directly relate to the Chapter 11 proceedings.
Terlipressin
DuringSeptember 2020 , theU.S. Food and Drug Administration ("FDA") issued a Complete Response Letter ("CRL") regarding our New Drug Application ("NDA") seeking approval for the investigational agent terlipressin to treat adults with hepatorenal syndrome type 1 ("HRS-1"). The CRL stated that, based on the available data, the agency cannot approve the terlipressin NDA in its current form and requires more information to support a positive risk-benefit profile for terlipressin for patients with HRS-1. In response to receipt of the CRL, we had an End of Review Meeting onOctober 26, 2020 and a Type A Meeting onJanuary 29, 2021 with the FDA where both parties engaged in constructive dialogue in an effort to clarify a viable path toU.S. approval and we expect to have clarity on this path in fiscal 2021. As we continue to engage with the FDA over the coming months, we will continue to assess the impact of any changes to planned revenue or earnings on the fair value of the associated in-process research and development ("IPR&D") asset of$81.0 million included within intangible assets, net on the unaudited condensed consolidated balance sheets as ofMarch 26, 2021 andDecember 25, 2020 . MNK-6105 and MNK-6106 During the three months endedMarch 26, 2021 , the Company recognized a full impairment on its Specialty Brands IPR&D asset related to MNK-6105 and MNK-6106 of$64.5 million . The Company has decided it will no longer pursue further development of this asset. Business Factors Influencing the Results of Operations COVID-19 Business Update The novel coronavirus ("COVID-19") pandemic has presented a substantial public health and economic challenge around the world. As we navigate the unprecedented challenges created by the COVID-19 pandemic, we remain committed to supporting our employees, customers, patients and the broader communities in which we operate. Since the onset of the COVID-19 pandemic, we have continued to manufacture, supply and deliver our products largely without interruption. At present, we do not anticipate significant COVID-19-related manufacturing or supply chain disruptions, and we continue to evaluate our end-to-end supply chain and assess opportunities to refine our processes going forward. We are supporting the fight against COVID-19 in a number of ways, including by partnering withNovoteris, LLC andMassachusetts General Hospital to study inhaled nitric oxide for use as a therapeutic option for COVID-19 patients; giving medically trained employees paid time off to volunteer to treat or care for COVID-19 patients; providing funding and therapies to hospitals to conduct treatment-related research; adapting certain of our manufacturing facilities to produce hand sanitizers for designated counties, state health departments and emergency operation distribution centers located in states where we have operations; donating excess personal protective equipment (PPE) and other resources to healthcare providers, first responders, and medical facilities; and partnering with advocacy groups to help mitigate the impact of the pandemic on patients. We expect the coming months to continue to be challenging due to the impact of COVID-19, as some of our products are sensitive to reduced numbers of surgical procedures and doctor visits. Our business performance was significantly impacted by COVID-19 during fiscal 2020 and the three months endedMarch 26, 2021 . The ultimate business impact going forward will largely be determined by the ongoing return to work guidance issued by international, national, and local governments and health officials and organizations. We are monitoring the demand for our products, including the duration and degree to which we may see declines in customer orders or delays in starting new patients on a product, such as Acthar Gel, due to the limited ability of our sales representatives to meet with physicians and patients to visit their doctors and pharmacists to receive prescriptions for certain of our products. In regards to Acthar Gel, we continue to see a reduction in new patients, which may continue to impact results in fiscal 2021. We may also experience reduced demand forTherakos due to immunosuppressed patients who have been instructed to stay-at-home during the COVID-19 pandemic. Furthermore, while we are supporting the continuation of ongoing patients in our clinical 30 -------------------------------------------------------------------------------- trials, as much as possible, we expect that COVID-19 precautions may directly or indirectly impact the timeline for some of our clinical trials. Given the rapid and evolving nature of the COVID-19 virus, the full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted. For additional information on the various risks posed by the COVID-19 pandemic, please read Part I, Item 1A. Risk Factors included within our Annual Report filed on Form 10-K for the fiscal year endedDecember 25, 2020 . Specialty Brands Net sales of Ofirmev® for the three months endedMarch 26, 2021 decreased$62.1 million , or 82.9%, to$12.8 million driven by the loss of exclusivity at the end of fiscal 2020 and the entrance of generic competition during the three months endedMarch 26, 2021 . Net sales of Acthar Gel for the three months endedMarch 26, 2021 decreased$38.6 million , or 23.0%, to$129.0 million driven primarily by the marketplace impact of the COVID-19 pandemic, continued payer scrutiny on overall specialty pharmaceutical spending and the prospective change to the Medicaid rebate calculation, which served to reduce Acthar Gel net sales by$12.5 million during the three months endedMarch 26, 2021 . Specialty Generics Net sales from the Specialty Generics segment decreased$25.6 million or 14.6% to$149.6 million for the three months endedMarch 26, 2021 compared to$175.2 million for the three months endedMarch 27, 2020 . Results of Operations Three Months EndedMarch 26, 2021 Compared with Three Months EndedMarch 27, 2020 Net Sales Net sales by geographic area were as follows (dollars in millions): Three Months Ended March 26, March 27, Percentage 2021 2020 Change U.S.$ 510.1 $ 587.9 (13.2) % Europe, Middle East and Africa 39.8 60.6 (34.3) Other geographic areas 8.1 17.3 (53.2) Net sales$ 558.0 $ 665.8 (16.2) % Net sales for the three months endedMarch 26, 2021 decreased$107.8 million or 16.2%, to$558.0 million compared with$665.8 million for the three months endedMarch 27, 2020 . This decrease was primarily driven by a decrease in our Specialty Brands segment including a significant decrease in net sales of Ofirmev and Acthar Gel, as previously mentioned. For further information on changes in our net sales, refer to "Segment Results" within this Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Operating Loss Gross profit. Gross profit for the three months endedMarch 26, 2021 decreased$33.4 million or 11.8%, to$250.4 million compared with$283.8 million for the three months endedMarch 27, 2020 , due in part to the$107.8 million decrease in net sales. Gross profit margin as a percentage of net sales was 44.9% for the three months endedMarch 26, 2021 , compared with 42.6% for the three months endedMarch 27, 2020 . This increase in gross profit margin was primarily driven by a change in product mix, as well as a decrease in amortization expense related to the Ofirmev intangible asset resulting from the asset being fully amortized at the end of fiscal 2020. Selling, general and administrative expenses. SG&A expenses for the three months endedMarch 26, 2021 were$136.0 million , compared with$231.1 million for the three months endedMarch 27, 2020 , a decrease of$95.1 million , or 41.2%. This decrease was primarily driven by the bankruptcy-related professional fees being classified as reorganization items, net, subsequent to the Petition Date. Comparatively, during the three months endedMarch 27, 2020 , we incurred$22.5 million and$21.3 million in opioid defense costs and separation costs, respectively, that were reflected in SG&A. The decrease was also driven by cost containment initiatives, a$10.0 million gain resulting from a net decrease in of our contingent consideration liabilities and lower travel expense due to 31 -------------------------------------------------------------------------------- temporary travel restrictions as a result of COVID-19. As a percentage of net sales, SG&A expenses were 24.4% and 34.7% for the three months endedMarch 26, 2021 andMarch 27, 2020 , respectively. Research and development expenses. Research and development ("R&D") expenses decreased$11.2 million , or 14.5%, to$66.2 million for the three months endedMarch 26, 2021 , compared with$77.4 million for the three months endedMarch 27, 2020 . The decrease was driven by the completion of certain development programs during fiscal 2020. The Company continues to focus current R&D activities on performing clinical studies and publishing clinical and non-clinical experiences and evidence that support health economic activities and patient outcomes. As a percentage of net sales, R&D expenses were 11.9% and 11.6% for the three months endedMarch 26, 2021 andMarch 27, 2020 , respectively. Non-restructuring impairment charges. During the three months endedMarch 26, 2021 , we recognized a full impairment on our Specialty Brands IPR&D asset related to MNK-6105 and MNK-6106 of$64.5 million . We have decided we will no longer pursue further development of this asset. Opioid-related litigation settlement. During the three months endedMarch 27, 2020 , we recorded a non-cash gain of$16.8 million as a result of the change in the settlement warrants' fair value primarily driven by the decreased value of our share price. Consistent with the determination atDecember 25, 2020 , the New Opioid Warrants continue to have no value as ofMarch 26, 2021 given we cannot reasonably estimate the equity value at emergence. For further information, refer to Note 11 of the notes to the unaudited condensed consolidated financial statements. Non-Operating Items Interest expense and interest income. During the three months endedMarch 26, 2021 andMarch 27, 2020 , net interest expense was$57.7 million and$71.0 million , respectively. The$14.9 million decrease in interest expense was primarily attributable to a lower average outstanding debt balance during the three months endedMarch 26, 2021 , partially offset by$14.5 million of expense related to adequate protection payments. This yielded a net decrease in interest expense of$13.4 million . Interest income decreased to$1.9 million for the three months endedMarch 26, 2021 , compared with$3.5 million for the three months endedMarch 27, 2020 primarily driven by lower interest rates. Other income, net. During the three months endedMarch 26, 2021 andMarch 27, 2020 we recorded other income, net, of$8.1 million and$1.7 million , respectively. The three months endedMarch 26, 2021 included an$8.4 million unrealized gain on the equity securities, inclusive of foreign currency gain related to our investment in Silence Therapeutics plc, compared to$3.0 million during the three months endedMarch 27, 2020 . These gains were offset by losses on intercompany financing, foreign currency transactions and related hedging instruments. Reorganization items, net. During the three months endedMarch 26, 2021 , we recorded$93.5 million of reorganization items, net in conjunction with our Chapter 11 proceedings. These charges included$77.7 million of advisor and legal fees directly related to the Chapter 11 Cases and$16.3 million of deferred financing fee write-offs related to the 2017 and 2018 Term Loans in order to reflect the respective carrying values within LSTC on the unaudited condensed consolidated balance sheet as ofMarch 26, 2021 at their estimated allowed claim amounts. Income tax benefit. We recognized an income tax benefit of$16.4 million on a loss from continuing operations before income taxes of$160.6 million for the three months endedMarch 26, 2021 , and an income tax benefit of$18.9 million on a loss from continuing operations before income taxes of$75.6 million for the three months endedMarch 27, 2020 . This resulted in effective tax rates of 10.2% and 25.0% for the three months endedMarch 26, 2021 andMarch 27, 2020 , respectively. The income tax benefit for the three months endedMarch 26, 2021 was comprised of$13.0 million of current tax benefit and$3.4 million of deferred tax benefit. The current income tax benefit was predominantly related to an increase to prepaid taxes, partially offset by changes to uncertain tax positions. The deferred tax benefit was predominantly related to intangible asset amortization, partially offset by utilization of loss carryforwards in non-valuation allowance jurisdictions. The income tax benefit for the three months endedMarch 27, 2020 was comprised of$22.4 million of current tax benefit and$3.5 million of deferred tax expense. The deferred tax expense was predominantly comprised of deferred tax expense as a result of the Coronavirus Aid, Relief, and Economic Security ("CARES") Act partially offset by deferred tax benefit related to previously acquired intangibles. The income tax benefit was$16.4 million for the three months endedMarch 26, 2021 , compared with an income tax benefit of$18.9 million for the three months endedMarch 27, 2020 . The$2.5 million net decrease in the tax benefit included a decrease of$11.0 million attributed to the CARES Act and a decrease of$8.0 million attributed to uncertain tax positions, partially offset by an increase of$15.4 million attributed to changes in the timing, amount and jurisdictional mix of income and an increase of$1.1 million attributed to separation costs, reorganization items, net and restructuring charges, net. Income from discontinued operations, net of income taxes. We recorded income from discontinued operations of$0.3 million and$6.5 million during the three months endedMarch 26, 2021 andMarch 27, 2020 , respectively. The income during the three months endedMarch 27, 2020 primarily related to the receipt of contingent consideration associated with the sale of our Nuclear Imaging business. The remaining activity in both periods related to various post-sale adjustments associated with our previous divestitures. 32 -------------------------------------------------------------------------------- Segment Results Management measures and evaluates our operating segments based on segment net sales and operating income. Management excludes corporate expenses from segment operating income. In addition, certain amounts that management considers to be non-recurring or non-operational are excluded from segment net sales and operating income because management and the chief operating decision maker evaluate the operating results of the segments excluding such items. These items include, but are not limited to, depreciation and amortization, share-based compensation, net restructuring charges, non-restructuring impairment charges, separation costs and changes related to the Opioid-Related Litigation Settlement. During the three months endedSeptember 25, 2020 , management began excluding depreciation and share-based compensation from its evaluation of the operating results of its segments. As a result, prior period segment operating income has been recast to reflect this change on a comparable basis. Although these amounts are excluded from segment net sales and segment operating income, as applicable, they are included in reported consolidated net sales and operating (loss) income and in the reconciliations presented below. Selected information by business segment is as follows: Three Months EndedMarch 26, 2021 Compared with Three Months EndedMarch 27, 2020 Net Sales Net sales by segment are shown in the following table (dollars in millions): Three Months Ended March 26, March 27, Percentage 2021 2020 Change Specialty Brands$ 408.4 $ 490.6 (16.8) % Specialty Generics 149.6 175.2 (14.6) Net sales $ 558.0$ 665.8 (16.2) Specialty Brands. Net sales for the three months endedMarch 26, 2021 decreased$82.2 million to$408.4 million , compared with$490.6 million for the three months endedMarch 27, 2020 . The decrease in net sales was primarily driven by a$62.1 million or 82.9% decrease in Ofirmev driven by the loss of exclusivity at the end of fiscal 2020 and the entrance of generic competition during the three months endedMarch 26, 2021 . The decrease in net sales also included a$38.6 million or 23.0% decrease in Acthar Gel net sales driven by the marketplace impact of the COVID-19 pandemic, continued payer scrutiny on overall specialty pharmaceutical spending and the prospective change to the Medicaid rebate calculation, which served to reduce Acthar Gel net sales by$12.5 million during the three months endedMarch 26, 2021 . These decreases were partially offset by a$20.3 million or 49.4% increase in Amitiza, primarily as a result of the royalty fromPar Pharmaceutical, Inc. , et al. (collectively Par) beginning fiscal 2021. Net sales for Specialty Brands by geography were as follows (dollars in millions): Three Months Ended March 26, March 27, Percentage 2021 2020 Change U.S.$ 384.7 $ 444.7 (13.5) % Europe, Middle East and Africa 18.7 32.5 (42.5) Other 5.0 13.4 (62.7) Net sales$ 408.4 $ 490.6 (16.8) Net sales for Specialty Brands by key products were as follows (dollars in millions): Three Months Ended March 26, March 27, 2021 2020 Percentage Change Acthar Gel $ 129.0 $ 167.6 (23.0) % INOmax 134.0 141.7 (5.4) Ofirmev 12.8 74.9 (82.9) Therakos 66.8 63.7 4.9 Amitiza 61.4 41.1 49.4 Other 4.4 1.6 175.0 Specialty Brands $ 408.4 $ 490.6 (16.8) 33
-------------------------------------------------------------------------------- Specialty Generics. Net sales for the three months endedMarch 26, 2021 decreased$25.6 million , or 14.6%, to$149.6 million , compared with$175.2 million for the three months endedMarch 27, 2020 . The decrease in net sales was driven by a decrease in other controlled substances products and hydrocodone-related product net sales of$25.5 million and$3.2 million , respectively, driven by increased competition. These decreases were partially offset by increases of$1.4 million and$1.4 million in acetaminophen and other products net sales, respectively, compared to the three months endedMarch 27, 2020 . Net sales for Specialty Generics by geography were as follows (dollars in millions): Three Months Ended March 26, March 27, Percentage 2021 2020 Change U.S.$ 125.4 $ 143.2 (12.4) % Europe, Middle East and Africa 21.1 28.1 (24.9) Other 3.1 3.9 (20.5) Net sales$ 149.6 $ 175.2 (14.6) Net sales for Specialty Generics by key products were as follows (dollars in millions): Three Months Ended March 26, March 27, 2021 2020 Percentage Change Hydrocodone (API) and hydrocodone-containing tablets$ 23.3 $ 26.5 (12.1) % Oxycodone (API) and oxycodone-containing tablets 17.2 16.9 1.8 Acetaminophen (API) 45.5 44.1 3.2 Other controlled substances 58.1 83.6 (30.5) Other 5.5 4.1 34.1 Specialty Generics$ 149.6 $ 175.2 (14.6) Operating Loss Operating income by segment and as a percentage of segment net sales for the three months endedMarch 26, 2021 andMarch 27, 2020 is shown in the following table (dollars in millions): Three Months Ended March 26, 2021 March 27, 2020 Specialty Brands$ 212.1 51.9 %$ 220.5 44.9 % Specialty Generics 31.7 21.2 63.2 36.1 Segment operating income 243.8 43.7 283.7 42.6 Unallocated amounts: Corporate and unallocated expenses (1) (22.6) (57.5) Depreciation and amortization (169.6) (223.1) Share-based compensation (3.6) (6.7) Restructuring charges, net (0.4) 1.8 Non-restructuring impairment charges (64.5) - Separation costs (2) (0.6) (21.3) Opioid-related litigation settlement gain (3) - 16.8 Total operating loss$ (17.5) $ (6.3) (1)Includes administration expenses and certain compensation, legal, environmental and other costs not charged to the Company's reportable segments. (2)Represents costs included in SG&A expenses, primarily related to professional fees and costs incurred in preparation for the Chapter 11 proceedings. As of the Petition Date, professional fees directly related to the Chapter 11 proceedings that were previously reflected as separation costs are being classified on a go-forward basis as reorganization items, net (3)Represents the change in the settlement warrants' fair value. Refer to Note 11 for further information. Specialty Brands. Operating income for the three months endedMarch 26, 2021 decreased$8.4 million , to$212.1 million , compared with$220.5 million for the three months endedMarch 27, 2020 . Operating margin increased to 51.9% for the three months endedMarch 26, 2021 compared with 44.9% for the three months endedMarch 27, 2020 . The decrease in operating income was primarily driven by a$62.9 million decrease to gross profit as a result of the decrease in net sales as discussed above, partially offset 34 -------------------------------------------------------------------------------- by a decrease of$38.7 million , or 30.9%, in SG&A expenses compared with the three months endedMarch 27, 2020 . The decrease in SG&A was primarily driven by the bankruptcy-related professional and legal fees being classified as reorganization items, net subsequent to the Petition Date, in addition to cost containment initiatives. Additionally, R&D expenses decreased$15.7 million , or 23.1%, compared with the three months endedMarch 27, 2020 , as previously discussed above. Specialty Generics. Operating income for the three months endedMarch 26, 2021 decreased$31.5 million to$31.7 million , compared with$63.2 million for the three months endedMarch 27, 2020 . Operating margin decreased to 21.2% for the three months endedMarch 26, 2021 , compared with 36.1% for the three months endedMarch 27, 2020 . The decrease in operating income and margin was primarily due to the$25.8 million decrease in gross profit, coupled with an increase in R&D expenses. Corporate and unallocated expenses. Corporate and unallocated expenses were$22.6 million and$57.5 million for the three months endedMarch 26, 2021 andMarch 27, 2020 , respectively. This decrease was primarily driven by the bankruptcy-related professional fees being classified as reorganization items, net, subsequent to the Petition Date, in addition to cost containment initiatives. Comparatively, during the three months endedMarch 27, 2020 , we incurred$22.5 million of opioid defense costs that were reflected in SG&A. The decrease also included a$10.0 million gain resulting from a net decrease in our contingent consideration liabilities. Liquidity and Capital Resources Significant factors driving our liquidity position include cash flows generated from operating activities, financing transactions, capital expenditures, cash paid in connection with acquisitions and licensing agreements and cash received as a result of our divestitures. We have historically generated and expect to continue to generate positive cash flows from operations. Our ability to fund our capital needs is impacted by our ongoing ability to generate cash from operations and access to capital markets. OnOctober 12, 2020 , we voluntarily initiated the Chapter 11 Cases in theBankruptcy Court to modify our capital structure, including restructuring portions of our debt, and resolve potential legal liabilities, including but not limited to those in connection with the Amended Proposed Opioid-Related Litigation Settlement and the Proposed Acthar Gel-Related Settlement. We intend to use the Chapter 11 process to provide a fair, orderly, efficient and legally binding mechanism to implement a RSA, entered into in connection with the filing of the Chapter 11 Cases, that provides for a financial restructuring designed to strengthen our balance sheet and reduce our total debt by approximately$1,300.0 million , improving our financial position and allowing us to continue driving our strategic priorities and investing in the business to develop and commercialize therapies to improve health outcomes. The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern. The transactions contemplated by the RSA are subject to approval by theBankruptcy Court , among other conditions. Accordingly, no assurance can be given that the transactions described therein will be consummated. As a result, we have concluded that management's plans at this stage do not alleviate substantial doubt about our ability to continue as a going concern. Consequently, our future cash from operations and access to capital markets may not provide adequate resources to fund our working capital needs, capital expenditures and strategic investments for the foreseeable future. Under our credit agreement, we are required to prepay our term loans in an amount equal to a specified percentage of excess cash flow. After receivingBankruptcy Court approval, we made a mandatory prepayment in an amount equal to$114.0 million during the three months endedMarch 26, 2021 . A summary of our cash flows from operating, investing and financing activities is provided in the following table (dollars in millions): Three Months Ended March 26, March 27, 2021 2020 Net cash from: Operating activities$ 151.4 $ 53.7 Investing activities (21.6) (16.7) Financing activities (118.9) (8.9)
Effect of currency exchange rate changes on cash and cash equivalents
(0.4) (1.5)
Net increase in cash and cash equivalents $ 10.5 $ 26.6
Operating Activities
Net cash provided by operating activities of $151.4 million for the three months
ended March 26, 2021 was attributable to a net loss of $143.9 million , adjusted
for non-cash items of $238.1 million , related to depreciation and amortization
of $169.6 million , and a non-cash impairment charge of $64.5 million . This net
loss was also offset by cash provided from net investment in working capital of
$57.2 million , which was primarily driven by a $61.8 million decrease in
accounts receivable and a $38.9 million net cash inflow
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related to other assets and liabilities primarily driven by an increase in
accrued consulting fees. These inflows were partially offset by a $22.8 million
increase in inventory and $21.2 million related to a decrease in net tax
payables and an increase in prepaid income taxes.
Net cash provided by operating activities of $53.7 million for the three months
ended March 27, 2020 was primarily attributable to net loss of $50.2 million ,
adjusted for non-cash items of $215.9 million driven by depreciation and
amortization of $223.1 million , partially offset by a non-cash gain of $16.8
million as a result of the change in the settlement warrant's fair value. Net
investment in working capital utilized $112.0 million of cash flow from
operating activities. Included within this change in working capital was an
$85.2 million net cash outflow related to other assets and liabilities,
including a $42.0 million decrease in accrued payroll liabilities and a $35.0
million decrease in restructuring liabilities, primarily driven by the
settlement and payment of contract termination costs related to the production
of Raplixa. Also driving the net investment in working capital was a $34.9
million increase in net receivables related to income taxes, a $22.9 million
decrease in accounts payable and an $18.4 million increase in inventory. These
were partially offset by a $49.4 million decrease in accounts receivable.
Investing Activities
Net cash used in investing activities was $21.6 million for the three months
ended March 26, 2021 , compared with $16.7 million for the three months ended
March 27, 2020 . The $4.9 million change was primarily attributable to a $6.4
million cash receipt during the three months ended March 27, 2020 related to
certain rabbi trust settlements, partially offset by a $1.0 million increase in
capital expenditures. Under our term loan credit agreement, the proceeds from
the sale of assets and businesses must be either reinvested into capital
expenditures or business development activities within one year of the
respective transaction or we are required to make repayments on our term loan.
For further information, refer to "Debt and Capitalization" within this Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Financing Activities
Net cash used in financing activities was $118.9 million for the three months
ended March 26, 2021 , compared with $8.9 million for the three months ended
March 27, 2020 . The $110.0 million increase was primarily attributable to a
$114.0 million increase in debt repayments, net of issuances, partially offset
by $4.0 million in debt issuance costs incurred during the three months ended
March 27, 2020 .
Debt and Capitalization
As of March 26, 2021 , the total debt principal was $5,164.4 million , of which
$3,446.5 million was classified within liabilities subject to compromise on the
consolidated balance sheet. The total debt principal as of March 26, 2021 was
comprised of the following:
Variable-rate instruments:
Term loan due September 2024 $ 1,411.2
Term loan due February 2025 374.6
Revolving credit facility 900.0
Fixed-rate instruments 2,478.6
Debt principal $ 5,164.4
The variable-rate term loan interest rates are based on the London Inter-bank
Offered Rate ("LIBOR"), subject to a minimum LIBOR level of 0.75% with interest
payments generally expected to be payable every 90 days, and requires quarterly
principal payments equal to 0.25% of the principal amount. As of March 26, 2021 ,
our fixed-rate instruments have a weighted-average interest rate of 7.05% and
pay interest at various dates throughout the fiscal year. As of March 26, 2021 ,
we were fully drawn on our $900.0 million revolving credit facility.
In November 2015 , our Board of Directors authorized us to reduce our outstanding
debt at our discretion. As conditions warrant, and subject to limitations under
Chapter 11, we may repurchase debt securities issued by us, in the open market,
in privately negotiated transactions, by tender offer or otherwise.
The commencement of the Chapter 11 Cases on October 12, 2020 constituted an
event of default under certain of our debt agreements. As of March 26, 2021 ,
other than any defaults relating to the Chapter 11 Cases, we were in full
compliance with the provisions and covenants associated with our debt
agreements. Accordingly, all long-term debt was classified as current on the
unaudited condensed consolidated balance sheet as of March 26, 2021 . However,
any efforts to enforce payment obligations under the
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--------------------------------------------------------------------------------debt instruments are automatically stayed as a result of the Chapter 11 Cases. See Note 2 and Note 9 of the notes to the unaudited condensed consolidated financial statements for further information.
Commitments and Contingencies Legal Proceedings See Note 11 of the notes to the unaudited condensed consolidated financial statements for a description of the legal proceedings and claims as ofMarch 26, 2021 .
Guarantees
In disposing of assets or businesses, we have historically provided representations, warranties and indemnities to cover various risks and liabilities, including unknown damage to the assets, environmental risks involved in the sale of real estate, liability to investigate and remediate environmental contamination at waste disposal sites and manufacturing facilities, and unidentified tax liabilities related to periods prior to disposition. We assess the probability of potential liabilities related to such representations, warranties and indemnities and adjust potential liabilities as a result of changes in facts and circumstances. We believe, given the information currently available, that their ultimate resolutions will not have a material adverse effect on our financial condition, results of operations and cash flows. These representations, warranties and indemnities are discussed in Note 10 of the notes to the unaudited condensed consolidated financial statements. Off-Balance Sheet Arrangements As ofMarch 26, 2021 , we had various letters of credit, guarantees and surety bonds totaling$34.5 million . There has been no change in our off-balance sheet arrangements during the three months endedMarch 26, 2021 . Critical Accounting Policies and Estimates The preparation of our unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in theU.S. (GAAP) requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosure of contingent assets and liabilities. We believe that our accounting policies for revenue recognition, intangible assets, acquisitions, contingencies and income taxes are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. During the three months endedMarch 26, 2021 , there were no significant changes to these policies or in the underlying accounting assumptions and estimates used in the above critical accounting policies from those disclosed in our Annual Report on Form 10-K for the year endedDecember 25, 2020 . Forward-Looking Statements We have made forward-looking statements in this Quarterly Report on Form 10-Q that are based on management's beliefs and assumptions and on information currently available to management. Forward-looking statements include, but are not limited to, information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, the effects of competition, and the effects of future legislation or regulations. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words "believe," "expect," "plan," "intend," "project," "anticipate," "estimate," "predict," "potential," "continue," "may," "could," "should" or the negative of these terms or similar expressions. Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not place undue reliance on any forward-looking statements. The risk factors included within Item 1A. of our Annual Report on Form 10-K for the fiscal year endedDecember 25, 2020 and within Part II, Item 1A of this Quarterly Report on Form 10-Q could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. These forward-looking statements are made as of the filing date of this Quarterly Report on Form 10-Q. We expressly disclaim any obligation to update these forward-looking statements other than as required by law. 37
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