ENDP-6.30.2018-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________ 
FORM 10-Q
____________________________________________________________________________________________ 
(Mark One)
x    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

or

o    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM                          TO
Commission File Number: 001-36326
____________________________________________________________________________________________
ENDO INTERNATIONAL PLC
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________________

Ireland
68-0683755
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification Number)
 
 
First Floor, Minerva House, Simmonscourt Road, Ballsbridge, Dublin 4, Ireland
Not Applicable
(Address of Principal Executive Offices)
(Zip Code)
011-353-1-268-2000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Ordinary shares, nominal value $0.0001 per share
The NASDAQ Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
____________________________________________________________________________________________
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes þ
No o
 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes þ
No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
 
 
Emerging Growth Company
o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
o
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes o
No
þ
Indicate the number of shares outstanding of each of the issuer’s classes of ordinary shares, as of the latest practicable date.
Ordinary shares, $0.0001 par value
Number of ordinary shares outstanding as of July 31, 2018:
223,931,072



ENDO INTERNATIONAL PLC
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents

FORWARD-LOOKING STATEMENTS
Statements contained or incorporated by reference in this document contain information that includes or is based on “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act) and Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act). These statements, including estimates of future revenues, future expenses, future net income and future net income per share, contained in the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which is included in this document, are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed results of operations. We have tried, whenever possible, to identify such statements by words such as “believes,” “expects,” “anticipates,” “intends,” “estimates,” “plan,” “projected,” “forecast,” “will,” “may” or similar expressions. We have based these forward-looking statements on our current expectations and projections about the growth of our business, our financial performance and the development of our industry. Because these statements reflect our current views concerning future events, these forward-looking statements involve risks and uncertainties. Investors should note that many factors, as more fully described under the caption “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, as supplemented and amended by the risk factors previously disclosed by us in Part II, Item 1A under the caption “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, could affect our future financial results and could cause our actual results to differ materially from those expressed in forward-looking statements contained or incorporated by reference in this document.
We do not undertake any obligation to update our forward-looking statements after the date of this document for any reason, even if new information becomes available or other events occur in the future, except as may be required under applicable securities law. You are advised to consult any further disclosures we make on related subjects in our reports filed with the Securities and Exchange Commission (SEC) and with securities regulators in Canada on the System for Electronic Document Analysis and Retrieval (SEDAR). Also note that, in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2017, as supplemented and amended by the risk factors previously disclosed by us in Part II, Item 1A under the caption “Risk Factors” of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, we provide a cautionary discussion of the risks, uncertainties and possibly inaccurate assumptions relevant to our business. These are factors that, individually or in the aggregate, we think could cause our actual results to differ materially from expected and historical results. We note these factors for investors as permitted by Section 27A of the Securities Act and Section 21E of the Exchange Act. You should understand that it is not possible to predict or identify all such factors. Consequently, you should not consider this to be a complete discussion of all potential risks or uncertainties.

i

Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.        Financial Statements
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(In thousands, except share and per share data)
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
1,098,788

 
$
986,605

Restricted cash and cash equivalents
358,211

 
320,453

Accounts receivable
451,240

 
517,436

Inventories, net
343,318

 
391,437

Prepaid expenses and other current assets
45,305

 
43,098

Income taxes receivable
12,036

 
12,048

Total current assets
$
2,308,898

 
$
2,271,077

MARKETABLE SECURITIES
2,404

 
1,456

PROPERTY, PLANT AND EQUIPMENT, NET
499,142

 
523,971

GOODWILL
4,055,193

 
4,450,082

OTHER INTANGIBLES, NET
3,923,866

 
4,317,684

DEFERRED INCOME TAXES
7

 
11,582

OTHER ASSETS
68,525

 
59,728

TOTAL ASSETS
$
10,858,035

 
$
11,635,580

LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued expenses
$
1,027,357

 
$
1,096,825

Current portion of legal settlement accrual
1,089,722

 
1,087,793

Current portion of long-term debt
34,205

 
34,205

Income taxes payable
1,782

 
2,086

Total current liabilities
$
2,153,066

 
$
2,220,909

DEFERRED INCOME TAXES
42,914

 
43,131

LONG-TERM DEBT, LESS CURRENT PORTION, NET
8,233,005

 
8,242,032

LONG-TERM LEGAL SETTLEMENT ACCRUAL, LESS CURRENT PORTION
70,732

 
210,450

OTHER LIABILITIES
420,395

 
434,178

COMMITMENTS AND CONTINGENCIES (NOTE 14)


 


SHAREHOLDERS' (DEFICIT) EQUITY:
 
 
 
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized and issued at both June 30, 2018 and December 31, 2017
47

 
48

Ordinary shares, $0.0001 par value; 1,000,000,000 shares authorized; 223,929,771 and 223,331,706 shares issued and outstanding at June 30, 2018 and December 31, 2017, respectively
22

 
22

Additional paid-in capital
8,819,262

 
8,791,170

Accumulated deficit
(8,659,819
)
 
(8,096,539
)
Accumulated other comprehensive loss
(221,589
)
 
(209,821
)
Total shareholders' (deficit) equity
$
(62,077
)
 
$
484,880

TOTAL LIABILITIES AND SHAREHOLDERS' (DEFICIT) EQUITY
$
10,858,035

 
$
11,635,580

See Notes to Condensed Consolidated Financial Statements.

1

Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(In thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
TOTAL REVENUES
$
714,696

 
$
875,731

 
$
1,415,223

 
$
1,913,331

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of revenues
381,905

 
539,401

 
785,503

 
1,208,363

Selling, general and administrative
148,157

 
155,555

 
314,824

 
332,795

Research and development
82,102

 
40,869

 
120,748

 
83,878

Litigation-related and other contingencies, net
19,620

 
(2,600
)
 
17,120

 
(1,664
)
Asset impairment charges
22,767

 
725,044

 
471,183

 
929,006

Acquisition-related and integration items
5,161

 
4,190

 
11,996

 
15,070

OPERATING INCOME (LOSS) FROM CONTINUING OPERATIONS
$
54,984

 
$
(586,728
)
 
$
(306,151
)
 
$
(654,117
)
INTEREST EXPENSE, NET
130,059

 
121,747

 
254,049

 
233,746

LOSS ON EXTINGUISHMENT OF DEBT

 
51,734

 

 
51,734

OTHER INCOME, NET
(28,831
)
 
(6,709
)
 
(31,709
)
 
(8,746
)
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
$
(46,244
)
 
$
(753,500
)
 
$
(528,491
)
 
$
(930,851
)
INCOME TAX EXPENSE (BENEFIT)
6,235

 
(57,480
)
 
21,726

 
(69,408
)
LOSS FROM CONTINUING OPERATIONS
$
(52,479
)

$
(696,020
)

$
(550,217
)
 
$
(861,443
)
DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
(8,388
)
 
(700,498
)
 
(16,139
)
 
(708,903
)
NET LOSS
$
(60,867
)
 
$
(1,396,518
)
 
$
(566,356
)
 
$
(1,570,346
)
NET LOSS PER SHARE—BASIC:
 
 
 
 
 
 
 
Continuing operations
$
(0.23
)
 
$
(3.12
)
 
$
(2.46
)
 
$
(3.86
)
Discontinued operations
(0.04
)
 
(3.14
)
 
(0.07
)
 
(3.18
)
Basic
$
(0.27
)
 
$
(6.26
)
 
$
(2.53
)
 
$
(7.04
)
NET LOSS PER SHARE—DILUTED:
 
 
 
 
 
 
 
Continuing operations
$
(0.23
)
 
$
(3.12
)
 
$
(2.46
)
 
$
(3.86
)
Discontinued operations
(0.04
)
 
(3.14
)
 
(0.07
)
 
(3.18
)
Diluted
$
(0.27
)
 
$
(6.26
)
 
$
(2.53
)
 
$
(7.04
)
WEIGHTED AVERAGE SHARES:
 
 
 
 
 
 
 
Basic
223,834

 
223,158

 
223,677

 
223,086

Diluted
223,834

 
223,158

 
223,677

 
223,086

See Notes to Condensed Consolidated Financial Statements.

2

Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (UNAUDITED)
(In thousands)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
NET LOSS
 
 
$
(60,867
)
 
 
 
$
(1,396,518
)
 
 
 
$
(566,356
)
 
 
 
$
(1,570,346
)
OTHER COMPREHENSIVE (LOSS) INCOME:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain on securities, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain arising during the period
$

 
 
 
$
491

 
 
 
$

 
 
 
$
145

 
 
Less: reclassification adjustments for (gain) loss realized in net loss

 

 

 
491

 

 

 

 
145

Net unrealized (loss) gain on foreign currency:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation (loss) gain arising during the period
$
(5,971
)
 
 
 
$
10,340

 
 
 
$
(11,768
)
 
 
 
$
25,474

 
 
Less: reclassification adjustments for (gain) loss realized in net loss

 
(5,971
)
 

 
10,340

 

 
(11,768
)
 

 
25,474

OTHER COMPREHENSIVE (LOSS) INCOME
 
 
$
(5,971
)
 
 
 
$
10,831

 
 
 
$
(11,768
)
 
 
 
$
25,619

COMPREHENSIVE LOSS
 
 
$
(66,838
)
 
 
 
$
(1,385,687
)
 
 
 
$
(578,124
)
 
 
 
$
(1,544,727
)
See Notes to Condensed Consolidated Financial Statements.

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Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Six Months Ended June 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net loss
$
(566,356
)
 
$
(1,570,346
)
Adjustments to reconcile Net loss to Net cash provided by operating activities:





Depreciation and amortization
379,646


499,656

Inventory step-up
190


215

Share-based compensation
29,986


27,005

Amortization of debt issuance costs and discount
10,112


12,757

Deferred income taxes
12,147


(179,775
)
Change in fair value of contingent consideration
10,962


8,134

Loss on extinguishment of debt


51,734

Asset impairment charges
471,183


929,006

Gain on sale of business and other assets
(26,993
)

(2,311
)
Changes in assets and liabilities which provided (used) cash:





Accounts receivable
48,744


409,292

Inventories
43,648


38,293

Prepaid and other assets
5,230


14,422

Accounts payable, accrued expenses and other liabilities
(199,065
)
 
85,350

Income taxes payable/receivable
(302
)

15,654

Net cash provided by operating activities
$
219,132


$
339,086

INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment, excluding capitalized interest
(41,960
)
 
(59,729
)
Capitalized interest payments
(1,677
)
 

Proceeds from sale of business and other assets, net
37,971

 
18,531

Other investing activities
(3,322
)
 

Net cash used in investing activities
$
(8,988
)
 
$
(41,198
)

4

Table of Contents

 
Six Months Ended June 30,
 
2018
 
2017
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of notes

 
300,000

Proceeds from issuance of term loans

 
3,415,000

Principal payments on term loans
(17,076
)
 
(3,713,875
)
Principal payments on other indebtedness
(2,574
)
 
(3,675
)
Deferred financing fees

 
(53,954
)
Payments for contingent consideration
(19,267
)
 
(41,240
)
Payments of tax withholding for restricted shares
(1,876
)
 
(1,839
)
Net cash used in financing activities
$
(40,793
)
 
$
(99,583
)
Effect of foreign exchange rate
(1,010
)
 
2,926

Movement in cash held for sale

 
(21,125
)
NET INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS
$
168,341

 
$
180,106

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF PERIOD
1,311,014

 
805,180

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD
$
1,479,355

 
$
985,286

SUPPLEMENTAL INFORMATION:
 
 
 
Cash paid into Qualified Settlement Funds for mesh legal settlements
$
126,400

 
$
522,770

Cash paid out of Qualified Settlement Funds for mesh legal settlements
$
148,824

 
$
440,190

Other cash distributions for mesh legal settlements
$
12,761

 
$
3,794

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrual for purchases of property, plant and equipment
$
3,118

 
$
1,325

See Notes to Condensed Consolidated Financial Statements.

5

Table of Contents

ENDO INTERNATIONAL PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018
NOTE 1. BASIS OF PRESENTATION
Endo International plc is an Ireland-domiciled, global specialty pharmaceutical company focused on generic and branded pharmaceuticals. We aim to be the premier partner to healthcare professionals and payment providers, delivering an innovative suite of generic and branded drugs to meet patients’ needs.
Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our,” or “us” refer to financial information and transactions of Endo International plc and its subsidiaries.
The accompanying unaudited Condensed Consolidated Financial Statements of Endo International plc and its subsidiaries have been prepared in accordance with United States (U.S.) generally accepted accounting principles (GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements of Endo International plc and its subsidiaries, which are unaudited, include all normal and recurring adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2018 and the results of our operations and our cash flows for the periods presented. Operating results for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2017 was derived from audited financial statements.
The information included in this Quarterly Report on Form 10-Q should be read in conjunction with our Consolidated Financial Statements and accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2017.
Certain prior period amounts have been reclassified to conform to the current period presentation as a result of our fourth-quarter 2017 adoption of Accounting Standards Update (ASU) No. 2016-18 “Statement of Cash Flows (Topic 230) - Restricted Cash” (ASU 2016-18). The table below presents the effects of ASU 2016-18 on the Company’s Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2017 (in thousands):
 
Prior to Adoption
 
Impact of Adoption
 
Subsequent to Adoption
Net cash provided by operating activities
$
340,986

 
$
(1,900
)
 
$
339,086

Net cash used in investing activities
(123,780
)
 
82,582

 
(41,198
)
Net cash used in financing activities
(99,583
)
 

 
(99,583
)
Effect of foreign exchange rate
2,786

 
140

 
2,926

Movement in cash held for sale
(21,125
)
 

 
(21,125
)
Net change (1)
$
99,284

 
$
80,822

 
$
180,106

Beginning-of-period balance (2)
517,250

 
287,930

 
805,180

End-of-period balance (2)
$
616,534

 
$
368,752

 
$
985,286

__________
(1)
This line refers to the “Net increase in cash and cash equivalents” prior to the adoption of ASU 2016-18 and the “Net increase in cash, cash equivalents, restricted cash and restricted cash equivalents” after the adoption.
(2)
These lines refer to the beginning or end of period amounts of “Cash and cash equivalents” prior to the adoption of ASU 2016-18 and the beginning or end of period amounts of “Cash, cash equivalents, restricted cash and restricted cash equivalents” after the adoption.
Additionally, the information in this Quarterly Report on Form 10-Q has been retrospectively recast to reflect the change in reportable segments referenced in Note 6. Segment Results.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies Updated since December 31, 2017
Significant changes to our significant accounting policies since December 31, 2017 are detailed below. For additional discussion of the Company’s significant accounting policies, see Note 2. Summary of Significant Accounting Policies in the Consolidated Financial Statements, included in Part IV, Item 15 of our Annual Report on Form 10-K for the year ended December 31, 2017, filed with the Securities and Exchange Commission on February 27, 2018.

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Table of Contents

Revenue Recognition. The Company adopted Accounting Standards Codification Topic 606, Revenue from Contracts with Customers (ASC 606) on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. For further discussion of the impact of adoption, refer to the “Recent Accounting Pronouncements Adopted or Otherwise Effective as of June 30, 2018” section below. ASC 606 applies to contracts with commercial substance that establish the payment terms and each party’s rights regarding the goods or services to be transferred, to the extent collection of substantially all of the related consideration is probable. Under ASC 606, we recognize revenue for contracts meeting these criteria when (or as) we satisfy our performance obligations for such contracts by transferring control of the underlying promised goods or services to our customers. The amount of revenue we recognize reflects our estimate of the consideration we expect to be entitled to receive, subject to certain constraints, in exchange for such goods or services. This amount is referred to as the transaction price.
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order and invoice the customer upon shipment. For contracts such as these, revenue is recognized when our contractual performance obligations have been fulfilled and control has been transferred to the customer pursuant to the contract’s terms, which is generally upon delivery to the customer. The amount of revenue we recognize is equal to the fixed amount of the transaction price, adjusted for our estimates of a number of significant variable components including, but not limited to, estimates for chargebacks, rebates, sales incentives and allowances, distribution service agreement (DSA) and other fees for services, returns and allowances. The Company utilizes the expected value method when estimating the amount of variable consideration to include in the transaction price with respect to each of the foregoing variable components and the most likely amount method when estimating the amount of variable consideration to include in the transaction price with respect to future potential milestone payments that do not qualify for the sales- and usage-based royalty exception. Variable consideration is included in the transaction price only to the extent that it is probable that a significant revenue reversal will not occur when the uncertainty associated with the variable consideration is resolved. Payment terms for these types of contracts generally fall within 30 to 90 days of invoicing. Our most significant components of variable consideration are further described below. Our estimates for these components are based on factors such as historical experience, estimated future trends, estimated customer inventory levels, current contract sales terms with our direct and indirect customers and other competitive factors.
Returns and Allowances. Consistent with industry practice, we maintain a return policy that allows our customers to return product within a specified period of time both subsequent to and, in certain cases, prior to the product’s expiration date. Our return policy generally allows customers to receive credit for expired products within six months prior to expiration and within one year after expiration. Our provision for returns and allowances consists of our estimates for future product returns, pricing adjustments and delivery errors.
Rebates. Our provision for rebates, sales incentives and other allowances can generally be categorized into the following four types:
direct rebates;
indirect rebates;
governmental rebates, including those for Medicaid, Medicare and TRICARE, among others; and
managed-care rebates.
We establish contracts with wholesalers, chain stores and indirect customers that provide for rebates, sales incentives, DSA fees and other allowances. Some customers receive rebates upon attaining established sales volumes. Direct rebates are generally rebates paid to direct purchasing customers based on a percentage applied to a direct customer’s purchases from us, including fees paid to wholesalers under our DSAs, as described above. Indirect rebates are rebates paid to indirect customers which have purchased our products from a wholesaler under a contract with us.
We are subject to rebates on sales made under governmental and managed-care pricing programs based on relevant statutes with respect to governmental pricing programs and contractual sales terms with respect to managed-care providers and group purchasing organizations. For example, we are required to provide a 50% discount on our brand-name drugs to patients who fall within the Medicare Part D coverage gap, also referred to as the donut hole.
We participate in various federal and state government-managed programs whereby discounts and rebates are provided to participating government entities. For example, Medicaid rebates are amounts owed based upon contractual agreements or legal requirements with public sector (Medicaid) benefit providers after the final dispensing of the product by a pharmacy to a benefit plan participant.
Chargebacks. We market and sell products to both: (i) direct customers including wholesalers, distributors, warehousing pharmacy chains and other direct purchasing groups and (ii) indirect customers including independent pharmacies, non-warehousing chains, managed-care organizations, group purchasing organizations and government entities. We enter into agreements with certain of our indirect customers to establish contract pricing for certain products. These indirect customers then independently select a wholesaler from which to purchase the products at these contracted prices. Alternatively, we may pre-authorize wholesalers to offer specified contract pricing to other indirect customers. Under either arrangement, we provide credit to the wholesaler for any difference between the contracted price with the indirect customer and the wholesaler’s invoice price. Such credit is called a chargeback.

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Table of Contents

New Significant Accounting Policies Added since December 31, 2017
Contract Assets and Contract Liabilities. Contract assets represent the Company’s right to consideration in exchange for goods or services that the Company has transferred to a customer when that right is conditioned on something other than the passage of time including, for example, the entity’s future performance. The Company records revenue and a corresponding contract asset when it fulfills a contractual performance obligation, but must also fulfill one or more additional performance obligations before being entitled to payment. Once the Company’s right to consideration becomes unconditional, the contract asset amount is reclassified as Accounts receivable.
Contract liabilities represent the Company’s obligation to transfer goods or services to a customer. The Company records a contract liability generally upon receipt of consideration in advance of fulfilling one or more of its contractual performance obligations. Upon completing the corresponding performance obligation, the contract liability amount is reversed and revenue is recognized.
Contract assets and liabilities related to rights and obligations arising from a single contract, or a series of contracts combined and accounted for as a single contract, are generally presented on a net basis. Contract assets and liabilities are further described in Note 11. Contract Assets and Liabilities.
Recent Accounting Pronouncements
Recently Issued Accounting Pronouncements Not Yet Adopted as of June 30, 2018
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-02, “Leases (Topic 842)” (ASU 2016-02) to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Under the new guidance, lessees are required to recognize a lease liability, which represents the discounted obligation to make future minimum lease payments, and a corresponding right-of-use asset on the balance sheet for most leases. In July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (ASU 2018-10), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard, and ASU No. 2018-11, “Leases (Topic 842) - Targeted Improvements” (ASU 2018-11), which addresses implementation issues related to the new lease standard. This guidance will be effective for the Company beginning in the first quarter of 2019, with early application permitted, and the Company plans to adopt this guidance in the first quarter of 2019. The Company is continuing to evaluate the impact that this new guidance will have on its consolidated financial statements, including its disclosures and the method of adoption. It is expected that the primary impact upon adoption will be the recognition, on a discounted basis, of the Company’s minimum commitments under noncancelable operating leases as right of use assets and obligations on the consolidated balance sheets. This will result in a significant increase in assets and liabilities on the Company’s consolidated balance sheets. In preparation for the adoption of this guidance, the Company is continuing the process of identifying and validating the Company’s lease information and evaluating the impact that this new guidance will have on its processes and controls.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (ASU 2018-02). ASU 2018-02 allows for a reclassification from accumulated other comprehensive income or loss to retained earnings or accumulated deficit for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (TCJA). ASU 2018-02 also requires certain related disclosures. ASU 2018-02 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018 and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2018-02 on the Company’s consolidated results of operations and financial position.
In July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (ASU 2018-09). ASU 2018-09 makes changes to a variety of topics to clarify, correct errors in or make minor improvements to the Accounting Standards Codification. Certain of these provisions are effective immediately; however, these provisions did not have a material impact on the Company’s financial statements or disclosures. The remaining provisions are generally effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2018. The Company is currently evaluating the impact of these remaining provisions of ASU 2018-09 on the Company’s consolidated results of operations and financial position.
Recent Accounting Pronouncements Adopted or Otherwise Effective as of June 30, 2018
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09), which was subsequently amended and supplemented by several additional ASUs including:
ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” (issued in August 2015), which deferred the effective date of ASU 2014-09 by one year, such that ASU 2014-09 became effective for Endo for annual and interim reporting periods beginning after December 15, 2017;
ASU No. 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)” (issued in March 2016), which clarified the guidance on reporting revenue as a principal versus agent;

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ASU No. 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (issued in April 2016), which clarified the guidance on identifying performance obligations and accounting for intellectual property licenses; and
ASU No. 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” and ASU No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” (issued in May 2016 and December 2016, respectively), which amended certain narrow aspects of Topic 606.
These ASUs have generally been codified in Accounting Standards Codification Topic 606 “Revenue from Contracts with Customers”, and are collectively referred to herein as ASC 606. ASC 606 supersedes the revenue recognition requirements in Topic 605 “Revenue Recognition” (ASC 605), and requires entities to recognize revenue when control of promised goods or services is transferred to customers at an amount that reflects the consideration to which entities expect to be entitled in exchange for those goods or services.
The Company adopted ASC 606 on January 1, 2018 using the modified retrospective method for all revenue-generating contracts, including modifications thereto, that were not completed contracts at the date of adoption. Under the modified retrospective method, results beginning on January 1, 2018 are presented under ASC 606, while the comparative prior period results continue to be presented under ASC 605 based on the accounting standards originally in effect for such periods. As a result of adopting ASC 606, the Company recorded a net decrease of $3.1 million to its accumulated deficit at January 1, 2018, representing the cumulative impact of adopting ASC 606.
The current period impact of adoption on our Condensed Consolidated Statements of Operations and Condensed Consolidated Balance Sheets is as follows (in thousands):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Statement of Operations:
Amounts reported under ASC 606
 
Amounts assuming continued application of ASC 605
 
Effect of adoption of ASC 606 (1)
 
Amounts reported under ASC 606
 
Amounts assuming continued application of ASC 605
 
Effect of adoption of ASC 606 (1)
Total revenues
$
714,696

 
$
709,887

 
$
4,809

 
$
1,415,223

 
$
1,412,561

 
$
2,662

Cost of revenues
$
381,905

 
$
379,286

 
$
2,619

 
$
785,503

 
$
784,612

 
$
891

Other income, net
$
(28,831
)
 
$
(27,831
)
 
$
(1,000
)
 
$
(31,709
)
 
$
(30,709
)
 
$
(1,000
)
(Loss) income from continuing operations
$
(52,479
)
 
$
(55,669
)
 
$
3,190

 
$
(550,217
)
 
$
(552,988
)
 
$
2,771

Net (loss) income
$
(60,867
)
 
$
(64,057
)
 
$
3,190

 
$
(566,356
)
 
$
(569,127
)
 
$
2,771

Net (loss) income per share—Basic:
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.23
)
 
$
(0.25
)
 
$
0.02

 
$
(2.46
)
 
$
(2.47
)
 
$
0.01

Total basic
$
(0.27
)
 
$
(0.29
)
 
$
0.02

 
$
(2.53
)
 
$
(2.54
)
 
$
0.01

Net (loss) income per share—Diluted:
 
 
 
 
 
 
 
 
 
 
 
Continuing operations
$
(0.23
)
 
$
(0.25
)
 
$
0.02

 
$
(2.46
)
 
$
(2.47
)
 
$
0.01

Total diluted
$
(0.27
)
 
$
(0.29
)
 
$
0.02

 
$
(2.53
)
 
$
(2.54
)
 
$
0.01

__________
(1)
Amounts may not add due to rounding.

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At June 30, 2018
Balance Sheet:
Amounts reported under ASC 606
 
Amounts assuming continued application of ASC 605
 
Effect of adoption of ASC 606
Assets:
 
 
 
 
 
Inventories, net
$
343,318

 
$
353,012

 
$
(9,694
)
Prepaid expenses and other current assets
$
45,305

 
$
34,994

 
$
10,311

Other assets
$
68,525

 
$
63,579

 
$
4,946

Liabilities:
 
 
 
 
 
Accounts payable and accrued expenses
$
1,027,357

 
$
1,027,641

 
$
(284
)
Shareholders' (deficit) equity:
 
 
 
 
 
Accumulated deficit
$
(8,659,819
)
 
$
(8,665,666
)
 
$
5,847

In May 2017, the FASB issued ASU No. 2017-09 “Compensation - Stock Compensation” (ASU 2017-09). ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. It is intended to reduce both (1) diversity in practice and (2) cost and complexity when accounting for changes to the terms or conditions of share-based payment awards. ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Company adopted the new standard on January 1, 2018 and the amendments in this update will be applied prospectively to any award modified on or after the adoption date.
NOTE 3. DISCONTINUED OPERATIONS AND DIVESTITURES
Astora
The Company’s Astora business ceased business operations on March 31, 2016. The operating results of Astora are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The following table provides the operating results of Astora Discontinued operations, net of tax for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Litigation-related and other contingencies, net
$

 
$
775,474

 
$

 
$
775,684

Loss from discontinued operations before income taxes
$
(8,388
)
 
$
(791,588
)
 
$
(16,139
)
 
$
(804,485
)
Income tax benefit
$

 
$
(91,090
)
 
$

 
$
(95,582
)
Discontinued operations, net of tax
$
(8,388
)
 
$
(700,498
)
 
$
(16,139
)
 
$
(708,903
)
Amounts reported in the table above as Litigation-related and other contingencies, net primarily relate to charges for vaginal-mesh-related matters, which are further described in Note 14. Commitments and Contingencies. Loss from discontinued operations before income taxes also includes mesh-related legal defense costs and certain other items.
The cash flows from discontinued operating activities related to Astora included the impact of net losses of $16.1 million and $708.9 million for the six months ended June 30, 2018 and 2017, respectively, and the impact of cash activity related to vaginal mesh cases, which is further described in Note 14. Commitments and Contingencies. There was no net cash used in discontinued investing activities related to Astora during the six months ended June 30, 2018 or 2017. There was no depreciation or amortization during the six months ended June 30, 2018 or 2017 related to Astora.
Litha
During the fourth quarter of 2016, the Company initiated a process to sell its Litha Healthcare Group Limited and related Sub-Sahara African business assets (Litha) and, on February 27, 2017, the Company entered into a definitive agreement to sell Litha to Acino Pharma AG (Acino). The sale closed on July 3, 2017 and the Company received net cash proceeds of approximately $94.2 million, after giving effect to cash and net working capital purchase price adjustments, as well as a short-term receivable of $4.4 million, which was subsequently collected in October 2017. No additional gain or loss was recognized upon sale. However, in December 2017, Acino became obligated to pay $10.1 million of additional consideration to the Company related to the settlement of certain contingencies set forth in the purchase agreement, which was subsequently paid to the Company in January 2018. In December 2017, the Company recorded a short-term receivable and a gain on the sale of Litha for this amount. The gain was recorded in Other income, net in the Condensed Consolidated Statements of Operations. Litha was part of the Company’s International Pharmaceuticals segment. Litha does not meet the requirements for treatment as a discontinued operation.

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Somar
On June 30, 2017, the Company entered into a definitive agreement to sell Grupo Farmacéutico Somar, S.A.P.I. de C.V. (Somar) and all of the securities thereof, to AI Global Investments (Netherlands) PCC Limited acting for and on behalf of the Soar Cell (the Purchaser). The sale closed on October 25, 2017 and the Purchaser paid an aggregate purchase price of approximately $124 million in cash, after giving effect to estimated cash, debt and net working capital purchase price adjustments. The Company recognized a $1.3 million loss upon sale. Somar was part of the Company’s International Pharmaceuticals segment. Somar does not meet the requirements for treatment as a discontinued operation.
NOTE 4. RESTRUCTURING
January 2017 Restructuring Initiative
On January 26, 2017, the Company announced a restructuring initiative implemented as part of its ongoing organizational review (the January 2017 Restructuring Initiative). This restructuring was intended to further integrate, streamline and optimize the Company’s operations by aligning certain corporate and research and development (R&D) functions with its recently restructured U.S. generics and U.S. branded business units in order to create efficiencies and cost savings. As part of this restructuring, the Company undertook certain cost reduction initiatives, including a reduction of approximately 90 positions of its workforce, primarily related to corporate and branded R&D functions in Malvern, Pennsylvania and Chestnut Ridge, New York, a streamlining of general and administrative expenses, an optimization of commercial spend and a refocusing of research and development efforts.
The Company did not incur any pre-tax charges during the three and six months ended June 30, 2018 as a result of the January 2017 Restructuring Initiative. During the six months ended June 30, 2017, the Company incurred total pre-tax charges of approximately $15.1 million related to employee separation and other benefit-related costs. Of the total charges incurred, $6.9 million was included in the U.S. Branded - Specialty & Established Pharmaceuticals segment, $4.9 million was included in Corporate unallocated costs and $3.3 million was included in the U.S. Generic Pharmaceuticals segment. These charges were included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. There were no charges related to this restructuring initiative for the three months ended June 30, 2017. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments were made by the end of 2017 and substantially all of the actions associated with this restructuring were completed by the end of April 2017.
2017 U.S. Generic Pharmaceuticals Restructuring Initiative
On July 21, 2017, the Company announced that after completing a comprehensive review of its manufacturing network, the Company would be ceasing operations and closing its manufacturing and distribution facilities in Huntsville, Alabama (the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative). The closure of the facilities was completed in June 2018. Employee separation, retention and certain other employee benefit-related costs are expensed ratably over the requisite service period. Other costs including, but not limited to, contract termination fees and product technology transfer costs, are expensed as incurred.
As a result of the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative, the Company incurred pre-tax charges of $27.1 million and $54.8 million during the three and six months ended June 30, 2018, respectively. During the three months ended June 30, 2018, the expenses consisted of charges relating to accelerated depreciation of $18.0 million, employee separation, retention and other benefit-related costs of $3.9 million and certain other charges of $5.2 million. During the six months ended June 30, 2018, the expenses consisted of charges relating to accelerated depreciation of $35.2 million, employee separation, retention and other benefit-related costs of $7.7 million, asset impairment charges of $2.6 million and certain other charges of $9.3 million. During both the three and six months ended June 30, 2017, the Company incurred pre-tax charges of $109.3 million, consisting of certain intangible asset and property, plant and equipment impairment charges of $89.5 million, charges to increase excess inventory reserves of $7.9 million and certain other charges of $11.9 million.
These charges are included in the U.S. Generic Pharmaceuticals segment. Accelerated depreciation and employee separation, retention and other benefit-related costs are included in Cost of revenues. Certain other charges are included in both Cost of revenues and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The Company expects to incur approximately $3.6 million of other miscellaneous additional pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments are expected to be made by the end of the third quarter in 2019.

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The liability related to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative is primarily included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the six months ended June 30, 2018 were as follows (in thousands):
 
Employee Separation and Other Benefit-Related Costs
 
Other Restructuring Costs
 
Total
Liability balance as of January 1, 2018
$
22,975

 
$
1,610

 
$
24,585

Expenses
7,709

 
6,603

 
14,312

Cash distributions
(12,733
)
 
(7,863
)
 
(20,596
)
Liability balance as of June 30, 2018
$
17,951

 
$
350

 
$
18,301

January 2018 Restructuring Initiative
In January 2018, the Company initiated a restructuring initiative that included a reorganization of its U.S. Generic Pharmaceuticals segment’s research and development network, a further simplification of the Company’s manufacturing networks and a company-wide unification of certain corporate functions (the January 2018 Restructuring Initiative).
As a result of the January 2018 Restructuring Initiative, the Company expects total related pre-tax charges of approximately $25 million, substantially all of which will result in cash outlays. The estimated restructuring charges consist of employee separation, retention and other benefit-related costs of approximately $23 million and certain other charges of approximately $2 million. Employee separation, retention and certain other employee benefit-related costs are expensed ratably over the requisite service period. Other costs are expensed as incurred.
As a result of the January 2018 Restructuring Initiative, the Company incurred pre-tax charges of $0.9 million and $23.8 million during the three and six months ended June 30, 2018, respectively. During the three months ended June 30, 2018, the expenses primarily consisted of employee separation, retention and other benefit-related costs of $0.7 million and certain other charges of $0.2 million. Of the total charges incurred, $0.6 million are included in the U.S. Generic Pharmaceuticals segment, $0.1 million are included in the International Pharmaceuticals segment and $0.2 million are included in the U.S. Branded - Sterile Injectables segment. During the six months ended June 30, 2018, the expenses primarily consisted of employee separation, retention and other benefit-related costs of $22.6 million and certain other charges of $1.2 million. Of the total charges incurred, $10.8 million are included in the U.S. Generic Pharmaceuticals segment, $5.2 million are included in Corporate unallocated costs, $4.0 million are included in the U.S. Branded - Sterile Injectables segment, $3.1 million are included in the International Pharmaceuticals segment and $0.7 million are included in the U.S. Branded - Specialty & Established Pharmaceuticals segment.
Employee separation, retention and other benefit-related costs are included in Cost of revenues, Selling, general and administrative and Research and development expenses in the Condensed Consolidated Statements of Operations. Certain other charges are primarily included in Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The Company does not expect to incur additional material pre-tax restructuring-related expenses related to this initiative. Substantially all cash payments are expected to be made by the end of the first quarter in 2019.
The liability related to the January 2018 Restructuring Initiative is primarily included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the six months ended June 30, 2018 were as follows (in thousands):
 
Employee Separation and Other Benefit-Related Costs
 
Other Restructuring Costs
 
Total
Liability balance as of January 1, 2018
$

 
$
650

 
$
650

Expenses
22,567

 
1,572

 
24,139

Cash distributions
(12,896
)
 
(1,783
)
 
(14,679
)
Liability balance as of June 30, 2018
$
9,671

 
$
439

 
$
10,110


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NOTE 5. ACQUISITIONS
On April 26, 2018, the Company entered into a Membership Interest and Asset Purchase Agreement (the Somerset Purchase Agreement) with Mendham Holdings, LLC (the Seller) and certain other Seller related parties in connection with the acquisition of all of the limited liability company membership interests (the LLC Interests) of Somerset Therapeutics, LLC (Somerset) and certain of Somerset’s assets, including intellectual property, product Abbreviated New Drug Applications (ANDAs) and inventory (the Somerset Assets). Somerset is a specialty pharmaceutical company that develops and markets sterile injectable and ophthalmic drugs for the U.S. market. The Somerset acquisition is contingent upon the closing of the acquisition of the Indian-based Wintac business (as defined below).
Pursuant to the terms of the Somerset Purchase Agreement, the Company will acquire 100% of the LLC Interests of Somerset and the Somerset Assets for an aggregate cash purchase price of approximately $160 million, subject to customary adjustments for cash, net working capital and indebtedness as described in the Somerset Purchase Agreement. The Somerset Purchase Agreement contains certain customary representations, warranties and covenants and provides for indemnification rights of the parties in respect of inaccuracies or breaches of certain representations, warranties and covenants, subject to the limitations set forth in the Somerset Purchase Agreement.
The Somerset acquisition is expected to close in the second half of 2018, subject to satisfaction of customary closing conditions, including required regulatory approvals and the closing of the acquisition of the Wintac business. In connection with the Somerset acquisition, the Company’s Indian subsidiary has entered into separate agreements to acquire the entire business of Somerset’s Indian-based contract development and manufacturing affiliate, Wintac Limited (Wintac), including certain real property in Bangalore, India and the manufacturing plants thereon and to assume certain debt of Wintac for the expected aggregate amount of the rupee equivalent of approximately $30 million, subject to customary adjustments for net working capital.
NOTE 6. SEGMENT RESULTS
As of January 1, 2018, we made changes to our reportable segments. Following these changes, the four reportable business segments in which we operate are: (1) U.S. Branded - Specialty & Established Pharmaceuticals, (2) U.S. Branded - Sterile Injectables, (3) U.S. Generic Pharmaceuticals and (4) International Pharmaceuticals. Previously, we had three reportable segments: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. The updates to our reportable segments were made based on first quarter 2018 changes to the way we manage and evaluate our business.
Our new U.S. Branded - Sterile Injectables segment consists of our sterile injectables product portfolio, which was previously part of our former U.S. Generic Pharmaceuticals segment. Our new U.S. Generic Pharmaceuticals segment represents the remainder of our former U.S. Generic Pharmaceuticals segment. Additionally, our former U.S. Branded Pharmaceuticals segment has been renamed “U.S. Branded - Specialty & Established Pharmaceuticals.”
Our segments reflect the level at which the chief operating decision maker regularly reviews financial information to assess performance and to make decisions about resources to be allocated. Each segment derives revenue from the sales or licensing of its respective products and is discussed in more detail below.
We evaluate segment performance based on each segment’s adjusted income from continuing operations before income tax, which we define as Loss from continuing operations before income tax and before certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs, earn-out payments or adjustments, changes in the fair value of contingent consideration and bridge financing costs; cost reduction and integration-related initiatives such as separation benefits, retention payments, other exit costs and certain costs associated with integrating an acquired company’s operations; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; gains or losses from early termination of debt; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate expenses incurred by the Company are not attributable to any specific segment. Accordingly, these costs are not allocated to any of the Company’s segments and are included in the results below as “Corporate unallocated costs.” Interest income and expense are also considered corporate items and not allocated to any of the Company’s segments. The Company’s consolidated adjusted income from continuing operations before income tax is equal to the combined results of each of its segments less these unallocated corporate items.
U.S. Branded - Specialty & Established Pharmaceuticals
Our U.S. Branded - Specialty & Established Pharmaceuticals segment includes a variety of branded prescription products to treat and manage conditions in urology, urologic oncology, endocrinology, pain and orthopedics. The products in this segment include XIAFLEX®, SUPPRELIN® LA, TESTOPEL®, NASCOBAL® Nasal Spray, AVEED®, PERCOCET®, VOLTAREN® Gel, LIDODERM®, EDEX®, TESTIM® and FORTESTA® Gel, among others.

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U.S. Branded - Sterile Injectables
Our U.S. Branded - Sterile Injectables segment consists primarily of branded sterile injectable products such as VASOSTRICT®, ADRENALIN® and APLISOL®, among others, and certain generic sterile injectable products, including ephedrine sulfate injection and neostigmine methylsulfate injection, among others.
U.S. Generic Pharmaceuticals
Our U.S. Generic Pharmaceuticals segment consists of a differentiated product portfolio including solid oral extended-release, solid oral immediate-release, abuse-deterrent products, liquids, semi-solids, patches, powders, ophthalmics and sprays and includes products in the pain management, urology, central nervous system disorders, immunosuppression, oncology, women’s health and cardiovascular disease markets, among others.
International Pharmaceuticals
Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). This segment’s key products serve growing therapeutic areas, including attention deficit hyperactivity disorder (ADHD), pain, women’s health and oncology. This segment also included: (i) our South African Litha business, which was sold in July 2017, and (ii) our Latin American Somar business, which was sold in October 2017.
The following represents selected information for the Company’s reportable segments for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Net revenues from external customers:
 
 
 
 
 
 
 
U.S. Branded - Specialty & Established Pharmaceuticals
$
212,637

 
$
245,188

 
$
412,872

 
$
495,347

U.S. Branded - Sterile Injectables
217,843

 
180,292

 
433,697

 
352,460

U.S. Generic Pharmaceuticals
241,236

 
383,020

 
490,476

 
932,835

International Pharmaceuticals (1)
42,980

 
67,231

 
78,178

 
132,689

Total net revenues from external customers
$
714,696

 
$
875,731

 
$
1,415,223

 
$
1,913,331

Adjusted income from continuing operations before income tax:
 
 
 
 
 
 
 
U.S. Branded - Specialty & Established Pharmaceuticals
$
83,749


$
127,595


$
177,563


$
257,087

U.S. Branded - Sterile Injectables
173,308


140,062


342,753


266,529

U.S. Generic Pharmaceuticals
90,302


113,804


164,582


328,936

International Pharmaceuticals
18,499


14,812


32,217


29,694

Total segment adjusted income from continuing operations before income tax
$
365,858


$
396,273


$
717,115


$
882,246

__________
(1)
Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada and, prior to the sale of Litha on July 3, 2017 and Somar on October 25, 2017, South Africa and Latin America.
There were no material revenues from external customers attributed to an individual country outside of the United States during any of the periods presented. There were no material tangible long-lived assets in an individual country other than the United States as of June 30, 2018 or December 31, 2017.

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The table below provides reconciliations of our consolidated Loss from continuing operations before income tax, which is determined in accordance with U.S. generally accepted accounting principles (U.S. GAAP), to our total segment adjusted income from continuing operations before income tax for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Total consolidated loss from continuing operations before income tax
$
(46,244
)
 
$
(753,500
)
 
$
(528,491
)
 
$
(930,851
)
Interest expense, net
130,059

 
121,747

 
254,049

 
233,746

Corporate unallocated costs (1)
43,046

 
34,152

 
95,506

 
81,620

Amortization of intangible assets
153,215

 
190,943

 
310,387

 
454,077

Inventory step-up
124

 
100

 
190

 
215

Upfront and milestone payments to partners
36,964

 
3,082

 
38,296

 
6,177

Separation benefits and other cost reduction initiatives (2)
29,153

 
24,614

 
78,140

 
47,284

Certain litigation-related and other contingencies, net (3)
19,620

 
(2,600
)
 
17,120

 
(1,664
)
Asset impairment charges (4)
22,767

 
725,044

 
471,183

 
929,006

Acquisition-related and integration items (5)
5,161

 
4,190

 
11,996

 
15,070

Loss on extinguishment of debt

 
51,734

 

 
51,734

Foreign currency impact related to the remeasurement of intercompany debt instruments
(574
)
 
(3,233
)
 
(3,088
)
 
(5,927
)
Other, net (6)
(27,433
)
 

 
(28,173
)
 
1,759

Total segment adjusted income from continuing operations before income tax
$
365,858

 
$
396,273

 
$
717,115

 
$
882,246

__________
(1)
Amounts include certain corporate overhead costs, such as headcount and facility expenses and certain other income and expenses.
(2)
Amounts primarily relate to employee separation costs of $5.4 million and $30.6 million for the three and six months ended June 30, 2018, respectively. Other amounts for the three and six months ended June 30, 2018 include accelerated depreciation of $18.1 million and $35.2 million, respectively, charges to increase excess inventory reserves of $0.2 million and $2.6 million, respectively, and other charges of $5.4 million and $9.7 million, respectively, each of which related primarily to our restructuring initiatives. During the three and six months ended June 30, 2017, amounts primarily relate to employee separation costs of $0.7 million and $21.5 million, respectively, charges to increase excess inventory reserves of $7.9 million during both periods and other charges of $16.0 million and $17.5 million, respectively, related primarily to the 2017 U.S. Generics Pharmaceuticals restructuring initiative. See Note 4. Restructuring for discussion of our material restructuring initiatives.
(3)
Amounts include adjustments for Litigation-related and other contingencies, net as further described in Note 14. Commitments and Contingencies.
(4)
Amounts primarily relate to charges to impair goodwill and intangible assets as further described in Note 9. Goodwill and Other Intangibles as well as charges to write down certain property, plant and equipment as further described in Note 7. Fair Value Measurements.
(5)
Amounts during the three and six months ended June 30, 2018 are primarily related to charges due to changes in the fair value of contingent consideration of $4.1 million and $11.0 million, respectively. Amounts during the three and six months ended June 30, 2017 include charges due to changes in the fair value of contingent consideration of $2.0 million and $8.1 million, respectively. All other amounts are directly related to costs associated with acquisition and integration efforts.
(6)
Amounts during the three and six months ended June 30, 2018 primarily relate to gains on sales of businesses and other assets, as further described in Note 17. Other income, net.
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.

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Table of Contents

The Company disaggregates its revenue from contracts with customers into the categories included in the table below (in thousands). The Company believes these categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors.

Three Months Ended June 30,

Six Months Ended June 30,

2018

2017

2018

2017
U.S. Branded - Specialty & Established Pharmaceuticals:
 
 
 
 
 
 
 
Specialty Products:
 
 
 
 
 
 
 
XIAFLEX®
$
63,500

 
$
50,077

 
$
120,641

 
$
99,602

SUPPRELIN® LA
19,963

 
23,649

 
40,540

 
42,830

Other Specialty (1)
36,429

 
36,745

 
70,626

 
72,773

Total Specialty Products
$
119,892

 
$
110,471

 
$
231,807

 
$
215,205

Established Products:
 
 
 
 
 
 
 
PERCOCET®
$
30,833

 
$
30,889

 
$
62,809

 
$
61,834

VOLTAREN® Gel
17,811

 
20,270

 
29,128

 
34,544

OPANA® ER

 
31,582

 

 
67,300

Other Established (2)
44,101

 
51,976

 
89,128

 
116,464

Total Established Products
$
92,745

 
$
134,717

 
$
181,065

 
$
280,142

Total U.S. Branded - Specialty & Established Pharmaceuticals (3)
$
212,637

 
$
245,188

 
$
412,872

 
$
495,347

U.S. Branded - Sterile Injectables:
 
 
 
 
 
 
 
VASOSTRICT®
$
106,329


$
95,750


$
220,054


$
194,908

ADRENALIN®
36,658


19,032


66,398


25,129

Other Sterile Injectables (4)
74,856


65,510


147,245


132,423

Total U.S. Branded - Sterile Injectables (3)
$
217,843


$
180,292


$
433,697


$
352,460

Total U.S. Generic Pharmaceuticals (5)
$
241,236

 
$
383,020

 
$
490,476

 
$
932,835

Total International Pharmaceuticals (6)
$
42,980

 
$
67,231

 
$
78,178

 
$
132,689

Total Revenues
$
714,696

 
$
875,731

 
$
1,415,223

 
$
1,913,331

__________
(1)
Products included within Other Specialty include TESTOPEL®, NASCOBAL® Nasal Spray and AVEED®.
(2)
Products included within Other Established include, but are not limited to, LIDODERM®, EDEX®, TESTIM® and FORTESTA® Gel, including the authorized generics.
(3)
Individual products presented above represent the top two performing products in each product category and/or any product having revenues in excess of $25 million during any quarterly period in 2018 or 2017.
(4)
Products included within Other Sterile Injectables include, but are not limited to, APLISOL®, ephedrine sulfate injection and neostigmine methylsulfate injection.
(5)
The U.S. Generic Pharmaceuticals segment is comprised of a portfolio of products that are generic versions of branded products, are distributed primarily through the same wholesalers, generally have no intellectual property protection and are sold within the U.S. During the three and six months ended June 30, 2017, combined sales of ezetimibe tablets and quetiapine ER tablets, for which we lost temporary marketing exclusivity during the second quarter of 2017, made up 6% and 13% of consolidated total revenue, respectively. No other individual product within this segment has exceeded 5% of consolidated total revenues for the periods presented.
(6)
The International Pharmaceuticals segment, which accounted for 6% of consolidated total revenues during both the three and six months ended June 30, 2018 and 8% and 7% of consolidated total revenues during the three and six months ended June 30, 2017, respectively, includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs, Inc. (Paladin). This segment also included: (i) our South African business, which was sold in July 2017 and consisted of Litha and certain assets acquired from Aspen Holdings in October 2015 and (ii) our Latin American business consisting of Somar, which was sold in October 2017.
NOTE 7. FAIR VALUE MEASUREMENTS
Financial Instruments
The financial instruments recorded in our Condensed Consolidated Balance Sheets include cash and cash equivalents (including money market funds and time deposits), restricted cash and cash equivalents, accounts receivable, marketable securities, equity and cost method investments, accounts payable and accrued expenses, acquisition-related contingent consideration and debt obligations. Included in cash and cash equivalents and restricted cash and cash equivalents are money market funds representing a type of mutual fund required by law to invest in low-risk securities (for example, U.S. government bonds, U.S. Treasury Bills and commercial paper). Money market funds pay dividends that generally reflect short-term interest rates. Due to their short-term maturity, the carrying amounts of non-restricted and restricted cash and cash equivalents (including money market funds and time deposits), accounts receivable, accounts payable and accrued expenses approximate their fair values.

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Table of Contents

At June 30, 2018 and December 31, 2017, the Company had combined restricted cash and cash equivalents of $380.6 million and $324.4 million, respectively, of which $358.2 million and $320.5 million, respectively, are classified as current assets and reported in our Condensed Consolidated Balance Sheets as Restricted cash and cash equivalents. The remaining amounts, which are classified as non-current assets, are reported in our Condensed Consolidated Balance Sheets as Other assets. Approximately $292.5 million and $313.8 million of our restricted cash and cash equivalents are held in qualified settlement funds (QSFs) for mesh-related matters at June 30, 2018 and December 31, 2017, respectively. The remaining amount of restricted cash and cash equivalents at June 30, 2018 primarily relates to other litigation-related matters. See Note 14. Commitments and Contingencies for further information.
Fair value guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
Marketable Securities
Equity securities consist of investments in the stock of publicly traded companies, the values of which are based on quoted market prices and thus represent Level 1 measurements within the above-defined fair value hierarchy. These securities are not held to support current operations and are therefore classified as non-current assets. Equity securities are included in Marketable securities in our Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017.
Acquisition-Related Contingent Consideration
The fair value of contingent consideration liabilities is determined using unobservable inputs; hence these instruments represent Level 3 measurements within the above-defined fair value hierarchy. These inputs include the estimated amount and timing of projected cash flows, the probability of success (achievement of the contingent event) and the risk-adjusted discount rate used to present value the probability-weighted cash flows. Subsequent to the acquisition date, at each reporting period, the contingent consideration liability is remeasured at current fair value with changes recorded in earnings. Changes in any of the inputs may result in a significant adjustment to fair value. See Recurring Fair Value Measurements below for additional information on acquisition-related contingent consideration.

17

Table of Contents

Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at June 30, 2018 and December 31, 2017 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
June 30, 2018
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
406,412

 
$

 
$

 
$
406,412

Time deposits

 
109,919

 

 
109,919

Equity securities
2,404

 

 

 
2,404

Total
$
408,816

 
$
109,919

 
$

 
$
518,735

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$

 
$

 
$
52,922

 
$
52,922

Acquisition-related contingent consideration—long-term

 

 
99,176

 
99,176

Total
$

 
$

 
$
152,098

 
$
152,098

 
Fair Value Measurements at Reporting Date using:
December 31, 2017
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Total
Assets:
 
 
 
 
 
 
 
Money market funds
$
439,831

 
$

 
$

 
$
439,831

Time deposits

 
303,410

 

 
303,410

Equity securities
1,456

 

 

 
1,456

Total
$
441,287

 
$
303,410

 
$

 
$
744,697

Liabilities:
 
 
 
 
 
 
 
Acquisition-related contingent consideration—short-term
$

 
$

 
$
70,543

 
$
70,543

Acquisition-related contingent consideration—long-term

 

 
119,899

 
119,899

Total
$

 
$

 
$
190,442

 
$
190,442

At June 30, 2018 and December 31, 2017, money market funds include $93.8 million and $35.6 million, respectively, in QSFs to be disbursed to mesh-related or other product liability claimants. Amounts in QSFs are considered restricted cash equivalents. See Note 14. Commitments and Contingencies for further discussion of our product liability cases. The differences between the amortized cost and fair value of our money market funds and equity securities were not material, individually or in the aggregate, at June 30, 2018 or December 31, 2017, nor were any of the related gross unrealized gains or losses.
Fair Value Measurements Using Significant Unobservable Inputs
The following table presents changes to the Company’s liability for acquisition-related contingent consideration, which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2018 and 2017 (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Beginning of period
$
169,287

 
$
234,391

 
$
190,442

 
$
262,113

Amounts settled
(20,967
)
 
(26,219
)
 
(48,734
)
 
(60,310
)
Changes in fair value recorded in earnings
4,127

 
1,950

 
10,962

 
8,134

Effect of currency translation
(349
)
 
338

 
(572
)
 
523

End of period
$
152,098

 
$
210,460

 
$
152,098

 
$
210,460


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At June 30, 2018, the fair value measurements of the contingent consideration obligations were determined using risk-adjusted discount rates ranging from 10% to 22% (weighted average rate of approximately 15%). Changes in fair value recorded in earnings related to acquisition-related contingent consideration are included in our Condensed Consolidated Statements of Operations as Acquisition-related and integration items, and amounts recorded for the short-term and long-term portions of acquisition-related contingent consideration are included in Accounts payable and accrued expenses and Other liabilities, respectively, in our Condensed Consolidated Balance Sheets.
The following table presents changes to the Company’s liability for acquisition-related contingent consideration during the six months ended June 30, 2018 by acquisition (in thousands):
 
Balance as of December 31, 2017
 
Fair Value Adjustments and Accretion
 
Payments and Other
 
Balance as of June 30, 2018
Auxilium acquisition
$
13,061

 
$
(223
)
 
$
(1,844
)
 
$
10,994

Lehigh Valley Technologies, Inc. acquisitions
63,001

 
6,674

 
(26,975
)
 
42,700

VOLTAREN® Gel acquisition
98,124

 
7,938

 
(19,227
)
 
86,835

Other
16,256

 
(3,427
)
 
(1,260
)
 
11,569

Total
$
190,442

 
$
10,962

 
$
(49,306
)
 
$
152,098

Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the six months ended June 30, 2018 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
 
Total Expense for the Six Months Ended June 30, 2018
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Assets:
 
 
 
 
 
 
 
Intangible assets, excluding goodwill (Note 9)
$

 
$

 
$
173,270

 
$
(76,967
)
Certain property, plant and equipment (1)

 

 

 
(3,216
)
Total
$

 
$

 
$
173,270

 
$
(80,183
)
__________
(1)
Amount includes $2.6 million related to the 2017 U.S. Generic Pharmaceuticals Restructuring Initiative, which is described further in Note 4. Restructuring.
Additionally, the Company recorded aggregate goodwill impairment charges during the six months ended June 30, 2018 of $391.0 million. Refer to Note 9. Goodwill and Other Intangibles for further description, including the valuation methodologies utilized.
NOTE 8. INVENTORIES
Inventories consist of the following at June 30, 2018 and December 31, 2017 (in thousands):
 
June 30, 2018
 
December 31, 2017
Raw materials (1)
$
117,199

 
$
124,685

Work-in-process (1)
91,857

 
109,897

Finished goods (1)
134,262

 
156,855

Total
$
343,318

 
$
391,437

__________
(1) The components of inventory shown in the table above are net of allowance for obsolescence.
Inventory that is in excess of the amount expected to be sold within one year, which relates primarily to XIAFLEX® inventory, is classified as long-term inventory and is not included in the table above. At June 30, 2018 and December 31, 2017, $11.3 million and $17.1 million, respectively, of long-term inventory was included in Other assets in the Condensed Consolidated Balance Sheets. As of June 30, 2018 and December 31, 2017, the Company’s Condensed Consolidated Balance Sheets included approximately $8.6 million and $5.9 million, respectively, of capitalized pre-launch inventories related to generic products that were not yet available to be sold.

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NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the six months ended June 30, 2018 were as follows (in thousands):
 
U.S. Branded - Specialty & Established Pharmaceuticals
 
U.S. Branded - Sterile Injectables
 
U.S. Generic Pharmaceuticals
 
International Pharmaceuticals
 
Total
Goodwill as of December 31, 2017
$
828,818

 
$

 
$
3,531,301

 
$
89,963

 
$
4,450,082

Allocation to current segments (1)

 
2,731,193

 
(2,731,193
)
 

 

Effect of currency translation

 

 

 
(3,889
)
 
(3,889
)
Goodwill impairment charges

 

 
(391,000
)
 

 
(391,000
)
Goodwill as of June 30, 2018
$
828,818

 
$
2,731,193

 
$
409,108

 
$
86,074

 
$
4,055,193

__________
(1)
This allocation relates to the change in segments described in Note 6. Segment Results. The amount of goodwill initially attributed to the new U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals segments was determined using a relative fair value methodology in accordance with U.S. GAAP.
The carrying amounts of goodwill at June 30, 2018 and December 31, 2017 are net of the following accumulated impairments (in thousands):

U.S. Branded - Specialty & Established Pharmaceuticals
 
U.S. Branded - Sterile Injectables
 
U.S. Generic Pharmaceuticals
 
International Pharmaceuticals
 
Total
Accumulated impairment losses as of December 31, 2017
$
855,810

 
$

 
$
2,342,549

 
$
463,545

 
$
3,661,904

Accumulated impairment losses as of June 30, 2018
$
855,810

 
$

 
$
2,733,549

 
$
443,708

 
$
4,033,067


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Table of Contents

Other Intangible Assets
Changes in the amount of other intangible assets for the six months ended June 30, 2018 are set forth in the table below (in thousands).
Cost basis:
Balance as of December 31, 2017
 
Acquisitions
 
Impairments
 
Other (1)
 
Effect of Currency Translation
 
Balance as of June 30, 2018
Indefinite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
$
347,200

 
$

 
$
(50,500
)
 
$

 
$

 
$
296,700

Total indefinite-lived intangibles
$
347,200

 
$

 
$
(50,500
)
 
$

 
$

 
$
296,700

Finite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Licenses (weighted average life of 12 years)
$
457,402

 
$

 
$

 
$

 
$

 
$
457,402

Tradenames
6,409

 

 

 

 

 
6,409

Developed technology (weighted average life of 11 years)
6,187,764

 

 
(26,467
)
 
(10,647
)
 
(11,892
)
 
6,138,758

Total finite-lived intangibles (weighted average life of 11 years)
$
6,651,575

 
$

 
$
(26,467
)
 
$
(10,647
)
 
$
(11,892
)
 
$
6,602,569

Total other intangibles
$
6,998,775

 
$

 
$
(76,967
)
 
$
(10,647
)
 
$
(11,892
)
 
$
6,899,269

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated amortization:
Balance as of December 31, 2017
 
Amortization
 
Impairments
 
Other (1)
 
Effect of Currency Translation
 
Balance as of June 30, 2018
Finite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Licenses
$
(370,221
)
 
$
(14,174
)
 
$

 
$

 
$

 
$
(384,395
)
Tradenames
(6,409
)
 

 

 

 

 
(6,409
)
Developed technology
(2,304,461
)
 
(296,213
)
 

 
10,647

 
5,428

 
(2,584,599
)
Total other intangibles
$
(2,681,091
)
 
$
(310,387
)
 
$

 
$
10,647

 
$
5,428

 
$
(2,975,403
)
Net other intangibles
$
4,317,684

 
 
 
 
 
 
 
 
 
$
3,923,866

__________
(1)
Other adjustments relate to the removal of certain fully amortized intangible assets.
Amortization expense for the three and six months ended June 30, 2018 totaled $153.2 million and $310.4 million, respectively. Amortization expense for the three and six months ended June 30, 2017 totaled $190.9 million and $454.1 million, respectively. Amortization expense is included in Cost of revenues in the Condensed Consolidated Statements of Operations. Estimated amortization of intangibles for the five fiscal years subsequent to December 31, 2017 is as follows (in thousands):
2018
$
623,324

2019
$
551,471

2020
$
491,046

2021
$
458,821

2022
$
438,071

Impairments
Endo tests goodwill and indefinite-lived intangible assets for impairment annually, or more frequently whenever events or changes in circumstances indicate that the asset might be impaired. Our annual assessment is performed as of October 1st.

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Table of Contents

As part of our goodwill and intangible asset impairment assessments, we estimate the fair values of our reporting units and our intangible assets using an income approach that utilizes a discounted cash flow model or, where appropriate, a market approach. The discounted cash flow models are dependent upon our estimates of future cash flows and other factors. These estimates of future cash flows involve assumptions concerning (i) future operating performance, including future sales, long-term growth rates, operating margins, tax rates, variations in the amount and timing of cash flows and the probability of achieving the estimated cash flows and (ii) future economic conditions. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The discount rates applied to the estimated cash flows are based on the overall risk associated with the particular assets and other market factors. We believe the discount rates and other inputs and assumptions are consistent with those that a market participant would use. Any impairment charges resulting from annual or interim goodwill and intangible asset impairment assessments are recorded to Asset impairment charges in our Condensed Consolidated Statements of Operations.
During the three and six months ended June 30, 2018 and 2017, the Company incurred the following goodwill and other intangible asset impairment charges:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Goodwill impairment charges
$

 
$
206,143

 
$
391,000

 
$
288,745

Other intangible asset impairment charges
$
22,767

 
$
476,971

 
$
76,967

 
$
595,877

A summary of significant goodwill and other intangible asset impairment tests and related charges is included below. Other intangible asset impairment charges that are not included in the below narrative totaled $22.8 million and $309.4 million during the three months ended June 30, 2018 and 2017, respectively, and $77.0 million and $382.8 million during the six months ended June 30, 2018 and 2017, respectively. These charges relate primarily to certain in-process research and development and/or developed technology intangible assets that were tested for impairment following changes in market conditions and certain other factors impacting recoverability.
Our first quarter 2018 change in segments described in Note 6. Segment Results resulted in changes to our reporting units for goodwill impairment testing purposes, including the creation of a new U.S. Branded - Sterile Injectables reporting unit, which was previously part of our Generics reporting unit. As a result of these changes, under U.S. GAAP, we tested the goodwill of the former Generics reporting unit immediately before the segment realignment and the goodwill of both the new U.S. Branded - Sterile Injectables and U.S. Generic Pharmaceuticals reporting units immediately after the segment realignment. These goodwill tests were performed using an income approach that utilizes a discounted cash flow model. The results of these goodwill impairment tests were as follows:
The former Generics reporting unit’s estimated fair value (determined using a discount rate of 9.5%) exceeded its carrying amount, resulting in no related goodwill impairment charge.
The new U.S. Branded - Sterile Injectables reporting unit’s estimated fair value (determined using a discount rate of 9.5%) exceeded its carrying amount, resulting in no related goodwill impairment charge.
The new U.S. Generic Pharmaceuticals reporting unit’s carrying amount exceeded its estimated fair value (determined using a discount rate of 9.5%), resulting in a pre-tax non-cash goodwill impairment charge of $391.0 million.
In March 2017, we announced that the Food and Drug Administration’s (FDA) Drug Safety and Risk Management and Anesthetic and Analgesic Drug Products Advisory Committees voted that the benefits of reformulated OPANA® ER (oxymorphone hydrochloride extended release) no longer outweigh its risks. In June 2017, we became aware of the FDA’s request that we voluntarily withdraw OPANA® ER from the market, and in July 2017, after careful consideration and consultation with the FDA, we decided to voluntarily remove OPANA® ER from the market. As a result of our decision, the Company determined that the carrying amount of its OPANA® ER intangible asset was no longer recoverable, resulting in a pre-tax, non-cash impairment charge of $20.6 million in the second quarter of 2017, representing the remaining carrying amount.
As a result of the withdrawal of OPANA® ER from the market and the continued erosion of our U.S. Branded Pharmaceuticals segment’s Established Products portfolio, we initiated an interim goodwill impairment analysis of our Branded reporting unit during the second quarter of 2017. We recorded a pre-tax, non-cash goodwill impairment charge of $180.4 million during the three months ended June 30, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. We estimated the fair value of the Branded reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Branded goodwill impairment test was 9.5%.

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Table of Contents

As further described in Note 4. Restructuring, the Company announced the 2017 U.S. Generic Pharmaceuticals restructuring initiative in July 2017, which includes the discontinuation of certain commercial products. As a result, the Company assessed the recoverability of the impacted products, resulting in pre-tax, non-cash intangible asset impairment charges of approximately $57.5 million during the second quarter of 2017. The Company also initiated an interim goodwill impairment analysis of its Generics reporting unit during the second quarter of 2017 as a result of the 2017 U.S. Generic Pharmaceuticals restructuring initiative and determined that the estimated fair value of the Generics reporting unit exceeded its carrying amount. Accordingly, no related goodwill impairment was recorded. The Company estimated the fair value of the Generics reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Generics goodwill impairment test was 9.0%.
Pursuant to an existing agreement with a wholly owned subsidiary of Novartis AG (Novartis), Paladin licensed the Canadian rights to commercialize serelaxin, an investigational drug for the treatment of acute heart failure (AHF). In March 2017, Novartis announced that a Phase 3 study of serelaxin in patients with AHF failed to meet its primary endpoints. As a result, we concluded that the full carrying amount of our serelaxin in-process research and development intangible asset was impaired, resulting in a $45.5 million pre-tax non-cash impairment charge for the three months ended March 31, 2017. In addition and as a result of the serelaxin impairment, we assessed the recoverability of our Paladin goodwill balance and determined that the estimated fair value of the Paladin reporting unit was below its carrying amount. We recorded a pre-tax, non-cash goodwill impairment charge of $82.6 million during the three months ended March 31, 2017 for the amount by which the carrying amount exceeded the reporting unit’s fair value. We estimated the fair value of the Paladin reporting unit using an income approach that utilized a discounted cash flow model. The discount rate applied to the estimated cash flows for our Paladin goodwill impairment test was 10.0%.
As further discussed in Note 3. Discontinued Operations and Divestitures, we entered into a definitive agreement to sell Somar on June 30, 2017, which resulted in Somar’s assets and liabilities being classified as held for sale. The initiation of held-for-sale accounting, together with the agreed upon sale price, triggered an impairment review. Accordingly, we performed an impairment analysis using a market approach and determined that impairment charges were required. We recorded pre-tax, non-cash impairment charges of $25.7 million and $89.5 million related to Somar’s goodwill and other intangible assets, respectively, during the second quarter of 2017, each of which represented the remaining carrying amounts of the corresponding assets.
NOTE 10. LICENSE AND COLLABORATION AGREEMENTS
Our subsidiaries have entered into certain license, collaboration and discovery agreements with third parties for product development. These agreements require our subsidiaries to share in the development costs of such products and the third parties grant marketing rights to our subsidiaries for such products.
Generally, under these agreements: (i) we are required to make upfront payments and other payments upon successful completion of regulatory or sales milestones, (ii) we are required to pay royalties on sales of the products arising from these agreements and (iii) termination is permitted with no significant continuing obligation.
During the three months ended June 30, 2018, we entered into a development, license and commercialization agreement with a third party pharmaceutical company related to five sterile injectable product candidates. Pursuant to this agreement, the third party will generally be responsible, at its expense, to develop and seek regulatory approval for these product candidates, and the Company will generally be responsible, at its expense, to launch and distribute any products that are approved. The Company will have exclusive license rights to all of these products launched in the U.S. and a first right of refusal for the Canadian territory. Upon entering into this agreement, the Company became obligated to make an upfront payment, which was recorded as Research and development expense in the Condensed Consolidated Statements of Operations during the three months ended June 30, 2018. The Company could become obligated to make additional payments based on certain potential future milestones being achieved.
There have been no other significant changes to our license, collaboration and discovery agreements since our Annual Report on Form 10-K for the year ended December 31, 2017.
NOTE 11. CONTRACT ASSETS AND LIABILITIES
Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order. Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied. At June 30, 2018, the unfulfilled performance obligations for these types of contracts relate to ordered but undelivered product. We generally expect to fulfill the performance obligations and recognize revenue within one week of entering into the underlying contract. Based on the short-term initial contract duration, additional disclosure about the remaining performance obligations is not required.
Certain of our other revenue-generating contracts, including license and collaboration agreements, may result in contract assets and/or contract liabilities. For example, we may recognize contract liabilities upon receipt of certain upfront and milestone payments from customers when there are remaining performance obligations.

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The following table shows the opening and closing balances of contract assets and contract liabilities from contracts with customers (dollars in thousands):
 
June 30, 2018
 
January 1, 2018
 
$ Change
 
% Change
Contract assets, net (1)
$
15,257

 
$
11,287

 
$
3,970

 
35
 %
Contract liabilities, net (2)
$
20,054

 
$
20,954

 
$
(900
)
 
(4
)%
__________
(1)
At June 30, 2018 and January 1, 2018, approximately $10.3 million and $8.2 million, respectively, of these contract asset amounts are classified as current assets and are included in Prepaid expenses and other current assets in the Company’s Condensed Consolidated Balance Sheets. The remaining amounts are classified as non-current and are included in Other assets. The net increase in contract assets during the six months ended June 30, 2018 was primarily due to certain sales activity during the period, partially offset by reclassifications to accounts receivable following the resolution of certain conditions other than the passage of time affecting the Company’s rights to consideration for the sale of certain goods.
(2)
At June 30, 2018 and January 1, 2018, approximately $1.7 million and $1.9 million, respectively, of these contract liability amounts are classified as current liabilities and are included in Accounts payable and accrued expenses in the Company’s Condensed Consolidated Balance Sheets. The remaining amounts are classified as non-current and are included in Other liabilities. During the six months ended June 30, 2018, the Company recognized revenue of $0.9 million that was included in the contract liability balance at January 1, 2018, resulting in a corresponding decrease in contract liabilities.
During the six months ended June 30, 2018, we recognized revenue of $0.5 million relating to performance obligations satisfied, or partially satisfied, in prior periods. Such revenue generally relates to changes in estimates with respect to our variable consideration.
NOTE 12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at June 30, 2018 and December 31, 2017 (in thousands):