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ENDP-9.30.2017-10Q
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 SEPTEMBER 30, 2017

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 November 1, 2017:
223,313,463


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 II, Item 1A of this document and in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, 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 June 30, 2017, and as otherwise enumerated herein, 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, 2016, 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 June 30, 2017 and as otherwise enumerated herein, 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)
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash equivalents
$
738,393

 
$
517,250

Restricted cash and cash equivalents
361,137

 
282,074

Accounts receivable
531,488

 
992,153

Inventories, net
443,270

 
555,671

Prepaid expenses and other current assets
32,716

 
77,523

Income taxes receivable
23,910

 
47,803

Assets held for sale
65,565

 
116,985

Total current assets
$
2,196,479

 
$
2,589,459

MARKETABLE SECURITIES
2,789

 
2,267

PROPERTY, PLANT AND EQUIPMENT, NET
575,023

 
669,596

GOODWILL
4,450,798

 
4,729,395

OTHER INTANGIBLES, NET
4,602,377

 
5,859,297

DEFERRED INCOME TAXES
257

 
7,817

OTHER ASSETS
67,748

 
417,278

TOTAL ASSETS
$
11,895,471

 
$
14,275,109

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Accounts payable and accrued expenses
$
1,097,185

 
$
1,454,084

Current portion of legal settlement accrual
889,220

 
1,015,932

Current portion of long-term debt
34,205

 
131,125

Income taxes payable
8,055

 
9,266

Liabilities held for sale
13,456

 
24,338

Total current liabilities
$
2,042,121

 
$
2,634,745

DEFERRED INCOME TAXES
80,410

 
192,297

LONG-TERM DEBT, LESS CURRENT PORTION, NET
8,246,605

 
8,141,378

LONG-TERM LEGAL SETTLEMENT ACCRUAL, LESS CURRENT PORTION
327,791

 
—

OTHER LIABILITIES
433,560

 
605,100

COMMITMENTS AND CONTINGENCIES (NOTE 11)


 


SHAREHOLDERS’ EQUITY:
 
 
 
Euro deferred shares, $0.01 par value; 4,000,000 shares authorized and issued at both September 30, 2017 and December 31, 2016
47

 
42

Ordinary shares, $0.0001 par value; 1,000,000,000 shares authorized; 223,301,809 and 222,954,175 shares issued and outstanding at September 30, 2017 and December 31, 2016, respectively
22

 
22

Additional paid-in capital
8,781,398

 
8,743,240

Accumulated deficit
(7,728,122
)
 
(5,688,281
)
Accumulated other comprehensive loss
(288,361
)
 
(353,434
)
Total shareholders’ equity
$
764,984

 
$
2,701,589

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
11,895,471

 
$
14,275,109

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 September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
TOTAL REVENUES
$
786,887

 
$
884,335

 
$
2,700,218

 
$
2,768,761

COSTS AND EXPENSES:
 
 
 
 
 
 
 
Cost of revenues
514,522

 
557,472

 
1,722,885

 
1,878,395

Selling, general and administrative
135,880

 
186,735

 
468,675

 
558,160

Research and development
39,644

 
44,885

 
123,522

 
137,166

Litigation-related and other contingencies, net
(12,352
)
 
18,256

 
(14,016
)
 
28,715

Asset impairment charges
94,924

 
93,504

 
1,023,930

 
263,080

Acquisition-related and integration items
16,641

 
19,476

 
31,711

 
80,201

OPERATING LOSS FROM CONTINUING OPERATIONS
$
(2,372
)
 
$
(35,993
)
 
$
(656,489
)
 
$
(176,956
)
INTEREST EXPENSE, NET
127,521

 
112,184

 
361,267

 
340,896

LOSS ON EXTINGUISHMENT OF DEBT
—

 
—

 
51,734

 
—

OTHER (INCOME) EXPENSE, NET
(2,097
)
 
(2,866
)
 
(10,843
)
 
402

LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAX
$
(127,796
)
 
$
(145,311
)
 
$
(1,058,647
)
 
$
(518,254
)
INCOME TAX (BENEFIT) EXPENSE
(28,109
)
 
46,185

 
(97,517
)
 
(627,807
)
(LOSS) INCOME FROM CONTINUING OPERATIONS
$
(99,687
)

$
(191,496
)

$
(961,130
)
 
$
109,553

DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3)
3,017

 
(27,423
)
 
(705,886
)
 
(118,747
)
CONSOLIDATED NET LOSS
$
(96,670
)
 
$
(218,919
)
 
$
(1,667,016
)
 
$
(9,194
)
Less: Net income attributable to noncontrolling interests
—

 
—

 
—

 
16

NET LOSS ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
$
(96,670
)
 
$
(218,919
)
 
$
(1,667,016
)
 
$
(9,210
)
NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—BASIC:
 
 
 
 
 
 
 
Continuing operations
$
(0.45
)
 
$
(0.86
)
 
$
(4.31
)
 
$
0.49

Discontinued operations
0.02

 
(0.12
)
 
(3.16
)
 
(0.53
)
Basic
$
(0.43
)
 
$
(0.98
)
 
$
(7.47
)
 
$
(0.04
)
NET (LOSS) INCOME PER SHARE ATTRIBUTABLE TO ENDO INTERNATIONAL PLC ORDINARY SHAREHOLDERS—DILUTED:
 
 
 
 
 
 
 
Continuing operations
$
(0.45
)
 
$
(0.86
)
 
$
(4.31
)
 
$
0.49

Discontinued operations
0.02

 
(0.12
)
 
(3.16
)
 
(0.53
)
Diluted
$
(0.43
)
 
$
(0.98
)
 
$
(7.47
)
 
$
(0.04
)
WEIGHTED AVERAGE SHARES:
 
 
 
 
 
 
 
Basic
223,299

 
222,767

 
223,157

 
222,579

Diluted
223,299

 
222,767

 
223,157

 
223,060

See Notes to Condensed Consolidated Financial Statements.

2

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
CONSOLIDATED NET LOSS
 
 
$
(96,670
)
 
 
 
$
(218,919
)
 
 
 
$
(1,667,016
)
 
 
 
$
(9,194
)
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain (loss) arising during the period
$
188

 
 
 
$
152

 
 
 
$
333

 
 
 
$
(855
)
 
 
Less: reclassification adjustments for loss (gain) realized in net loss
—

 
188

 
(6
)
 
146

 
—

 
333

 
(6
)
 
(861
)
Foreign currency translation gain (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency gain (loss) arising during the period
$
9,941

 
 
 
$
(6,195
)
 
 
 
$
35,415

 
 
 
$
52,959

 
 
Less: reclassification adjustments for loss realized in net loss
29,325

 
39,266

 
—

 
(6,195
)
 
29,325

 
64,740

 
—

 
52,959

OTHER COMPREHENSIVE INCOME (LOSS)
 
 
$
39,454

 
 
 
$
(6,049
)
 
 
 
$
65,073

 
 
 
$
52,098

CONSOLIDATED COMPREHENSIVE (LOSS) INCOME
 
 
$
(57,216
)
 
 
 
$
(224,968
)
 
 
 
$
(1,601,943
)
 
 
 
$
42,904

Less: Net income attributable to noncontrolling interests
 
 
—

 
 
 
—

 
 
 
—

 
 
 
16

Less: Other comprehensive income attributable to noncontrolling interests
 
 
—

 
 
 
—

 
 
 
—

 
 
 
38

COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO ENDO INTERNATIONAL PLC
 
 
$
(57,216
)
 
 
 
$
(224,968
)
 
 
 
$
(1,601,943
)
 
 
 
$
42,850

See Notes to Condensed Consolidated Financial Statements.

3
Table of Contents

ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
Consolidated net loss
$
(1,667,016
)
 
$
(9,194
)
Adjustments to reconcile consolidated net loss to Net cash provided by operating activities:





Depreciation and amortization
742,936


716,332

Inventory step-up
281


99,099

Share-based compensation
40,252


44,567

Amortization of debt issuance costs and discount
17,698


21,483

(Benefit) provision for bad debts
(381
)

6,264

Provision for inventory reserve
102,003


97,546

Deferred income taxes
(239,174
)

(613,318
)
Change in fair value of contingent consideration
23,574


24,790

Loss on extinguishment of debt
51,734


—

Asset impairment charges
1,023,930


284,409

(Gain) loss on sale of business and other assets
(5,074
)

3,848

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





Accounts receivable
471,829


342,012

Inventories
(10,956
)

(75,331
)
Prepaid and other assets
13,526


(289,631
)
Accounts payable and accrued expenses
(152,517
)

(651,767
)
Other liabilities
(6,728
)

(250,746
)
Income taxes payable/receivable
18,145


693,014

Net cash provided by operating activities
$
424,062


$
443,377

INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(94,102
)
 
(88,087
)
Acquisitions, net of cash acquired
—

 
(30,394
)
Proceeds from sale of marketable securities and investments
—

 
34

Decrease in notes receivable
7,000

 
—

Patent acquisition costs and license fees
—

 
(19,206
)
Proceeds from sale of business and other assets, net
96,066

 
6,686

Increase in restricted cash and cash equivalents
(624,145
)
 
(588,455
)
Decrease in restricted cash and cash equivalents
545,379

 
898,288

Net cash (used in) provided by investing activities
$
(69,802
)
 
$
178,866


4
Table of Contents

 
Nine Months Ended September 30,
 
2017
 
2016
FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of notes
300,000

 
—

Proceeds from issuance of term loans
3,415,000

 
—

Principal payments on term loans
(3,722,413
)
 
(76,000
)
Repayments of revolving debt
—

 
(225,000
)
Principal payments on other indebtedness
(4,912
)
 
(4,634
)
Deferred financing fees
(57,358
)
 
(500
)
Payment for contingent consideration
(63,712
)
 
(23,807
)
Payments of tax withholding for restricted shares
(1,958
)
 
(10,532
)
Exercise of options
—

 
1,952

Issuance of ordinary shares related to the employee stock purchase plan
—

 
4,010

Net cash used in financing activities
$
(135,353
)
 
$
(334,511
)
Effect of foreign exchange rate
3,686

 
1,497

Movement in cash held for sale
(1,450
)
 
—

NET INCREASE IN CASH AND CASH EQUIVALENTS
$
221,143

 
$
289,229

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
517,250

 
272,348

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
738,393

 
$
561,577

SUPPLEMENTAL INFORMATION:
 
 
 
Cash received from income taxes, net
$
6,225

 
$
702,786

Cash paid into Qualified Settlement Funds for mesh legal settlements
$
623,128

 
$
587,782

Cash paid out of Qualified Settlement Funds for mesh legal settlements
$
545,379

 
$
898,288

Other cash distributions for mesh legal settlements
$
3,625

 
$
5,561

SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Accrual for purchases of property, plant and equipment
$
884

 
$
2,201

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 NINE MONTHS ENDED SEPTEMBER 30, 2017
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 September 30, 2017 and the results of our operations and our cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2016 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, 2016.
NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards update (ASU) No. 2014-09, “Revenue from Contracts with Customers” (ASU 2014-09). ASU 2014-09 represents a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled to receive in exchange for those goods or services. This ASU sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed. In August 2015, the FASB issued ASU No. 2015-14, “Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,” which defers the effective date of ASU 2014-09 by one year, but permits companies to adopt one year earlier if they choose (i.e., the original effective date). As such, ASU 2014-09 will be effective for annual and interim reporting periods beginning after December 15, 2017. In March and April 2016, the FASB issued ASU No. 2016-08 “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net)” and ASU No. 2016-10 “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing,” respectively, which clarifies the guidance on reporting revenue as a principal versus agent, identifying performance obligations and accounting for intellectual property licenses. In addition, in May 2016, the FASB issued ASU No. 2016-12 “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients,” which amends certain narrow aspects of Topic 606, and in December 2016, the FASB issued ASU No. 2016-20 “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which amends certain narrow aspects of Topic 606.
The Company will adopt the new revenue recognition standard on January 1, 2018. The Company is currently evaluating the impact of ASU 2014-09 on its consolidated results of operations and financial position. The Company is also continuing to evaluate the internal control implications associated with the adoption of the new standard, including the identification and implementation, if necessary, of changes to its business processes, systems and controls to support recognition and disclosure under the new standard. The Company’s cross-functional implementation team consisting of representatives from across its business segments is progressing towards the completion of the diagnostic assessment of the impact of the standard on its contract portfolio, including review of customer contracts, as well as the Company’s current accounting policies and practices to identify potential differences that would result from applying the requirements of the new standard to its revenue contracts.
The majority of the Company’s revenue is generated from product sales and the Company currently does not anticipate a significant impact to revenue related to these arrangements; however, this analysis is preliminary and remains subject to change. In certain limited situations, under current GAAP, the Company has deferred revenue for certain product sales because the sales price was not deemed to be fixed or determinable. Under the new standard, the Company will be required to estimate the variable consideration associated with these transactions and record revenue at the point of sale.

6
Table of Contents

The Company also generates revenue from certain less significant transactions, including certain licensing arrangements. The Company has substantially completed its preliminary evaluation of the impact of the new standard on these other transactions and does not anticipate a significant impact on revenue related to these arrangements; however, this analysis is preliminary and remains subject to change.
The two permitted transition methods under the new standard are the full retrospective method, in which case the standard would be applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would be recognized at the date of initial application. The Company will utilize the modified retrospective method of adoption.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (ASU 2016-02). ASU 2016-02 establishes the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance requires lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2016-02 on the Company’s consolidated results of operations and financial position.
In August 2016, the FASB issued ASU No. 2016-15 “Classification of Certain Cash Receipts and Cash Payments” (ASU 2016-15). ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. One of the provisions of ASU 2016-15 is that cash outflows for debt prepayment or debt extinguishment costs should be classified as cash outflows for financing activities, rather than operating activities. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted in any interim or annual period, but all of ASU 2016-15 must be adopted in the same period. All updates should be applied using a retrospective transition method. The Company plans to adopt the new standard on January 1, 2018 and is currently evaluating the retrospective impact that the adoption of ASU 2016-15 will have on its comparative period consolidated statements of cash flows included within future filings. Upon adoption, the Company will also apply the provisions of ASU 2016-15 to future cash transactions.
In November 2016, the FASB issued ASU No. 2016-18 “Statement of Cash Flows (Topic 230) - Restricted Cash” (ASU 2016-18). ASU 2016-18 states that a statement of cash flows should explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, and all updates should be applied using a retrospective transition method. The Company plans to adopt the new standard on January 1, 2018. Subsequent to the adoption of ASU 2016-18 the mesh-related qualified settlement funds, which are further described in Note 11. Commitments and Contingencies, and other restricted cash accounts will be included in the beginning-of-period and end-of-period Cash and cash equivalents on the Condensed Consolidated Statements of Cash Flows and transfers into and out of the qualified settlement funds will therefore no longer result in separate investing cash flows in the Condensed Consolidated Statements of Cash Flows.
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. Early adoption is permitted. The Company plans to adopt the new standard on January 1, 2018 and the amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company is currently evaluating the impact of ASU 2017-09 on the Company’s consolidated results of operations and financial position.
Recently Adopted Accounting Pronouncements
In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory” (ASU 2015-11). ASU 2015-11 states that an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public entities, ASU 2015-11 is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company adopted ASU 2015-11 on January 1, 2017 and the adoption did not impact the Company’s consolidated results of operations and financial position.

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In March 2016, the FASB issued ASU No. 2016-09 “Improvements to Employee Share-Based Payment Accounting” (ASU 2016-09). ASU 2016-09 changes how companies account for certain aspects of share-based payments to employees including: (a) requiring all income tax effects of awards to be recognized in the income statement, rather than in additional paid in capital, when the awards vest or are settled, (b) eliminating the requirement that excess tax benefits be realized before companies can recognize them, (c) requiring companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, (d) increasing the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation, (e) requiring an employer to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on its statement of cash flows and (f) electing whether to account for forfeitures of share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. ASU 2016-09 is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. The Company adopted the new guidance on January 1, 2017 on a prospective basis, except for the provision requiring companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity, which was adopted retrospectively. As a result of the adoption, during the three and nine months ended September 30, 2017, the Company recognized tax expense of $1.3 million and $6.1 million, respectively, in its Condensed Consolidated Statement of Operations that would have been recorded as additional paid-in capital prior to adoption. There was no retrospective adjustment required to the Company’s statement of cash flows for the nine months ended September 30, 2016 related to the adoption ASU 2016-09. The adoption of ASU 2016-09 did not impact beginning retained earnings and the Company will continue to estimate forfeitures to determine the amount of compensation cost to be recognized in each period. None of the other provisions in this amended guidance had a significant impact on the Company’s consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory” (ASU 2016-16). ASU 2016-16 states that an entity should recognize the income tax consequences when an intra-entity transfer of an asset other than inventory occurs. ASU 2016-16 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. Early adoption is permitted as long as it is adopted in the first interim period of a fiscal year beginning after December 15, 2016. The Company early adopted ASU 2016-16 on January 1, 2017, resulting in the elimination of previously recorded deferred charges that were established in 2016. Specifically, the Company eliminated a $24.1 million current deferred charge and a $348.8 million non-current deferred charge that were reflected in our Condensed Consolidated Balance Sheet at December 31, 2016 as Prepaid expenses and other current assets and Other assets, respectively. The eliminations of these deferred charges were recorded as adjustments to retained earnings as of January 1, 2017. On adoption, the Company also recorded net deferred tax assets, primarily related to certain intangibles and tax deductible goodwill, of $479.7 million, fully offset by a corresponding valuation allowance.
In January 2017, the FASB issued ASU No. 2017-01 “Business Combinations (Topic 805) - Clarifying the Definition of a Business” (ASU 2017-01). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this update provide a screen to determine when an integrated set of assets and activities (collectively referred to as a “set”), is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further evaluated. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this update should be applied prospectively on or after the effective date. Early application of the amendments in this update is allowed. The Company early adopted this new standard on January 1, 2017.
In January 2017, the FASB issued ASU No. 2017-04 “Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment” (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under ASU 2017-04, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Additionally, an entity should consider the income tax effects of any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. ASU 2017-04 is effective for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 and an entity should apply the amendments of ASU 2017-04 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company early adopted this standard on January 1, 2017. Refer to Note 8. Goodwill and Other Intangibles for a description of goodwill impairment charges taken during the nine months ended September 30, 2017.

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NOTE 3. DISCONTINUED OPERATIONS AND ASSETS AND LIABILITIES HELD FOR SALE
American Medical Systems
On February 24, 2015, the Company’s Board of Directors (Board of Directors) approved a plan to sell the Company’s American Medical Systems Holdings, Inc. (AMS) business. The AMS business included the Men’s Health and Prostate Health businesses, which were sold to Boston Scientific Corporation on August 3, 2015, as well as the Women’s Health business (Astora). On February 24, 2016, the Company’s Board of Directors resolved to wind-down the remaining Astora business as it did not align with the Company’s strategic direction and to reduce Astora’s exposure to the mesh-related product liability. Astora ceased business operations on March 31, 2016.
The operating results of this business 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 AMS Discontinued operations, net of tax for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Revenue
$
81

 
$
387

 
$
260

 
$
30,101

Litigation-related and other contingencies, net
$
—

 
$
17,705

 
$
775,684

 
$
20,155

Asset impairment charges
$
—

 
$
—

 
$
—

 
$
21,328

Loss from discontinued operations before income taxes
$
(8,957
)
 
$
(27,309
)
 
$
(813,442
)
 
$
(118,633
)
Income tax benefit
$
(11,974
)
 
$
—

 
$
(107,556
)
 
$
—

Discontinued operations, net of tax
$
3,017

 
$
(27,309
)
 
$
(705,886
)
 
$
(118,633
)
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 11. Commitments and Contingencies.
The cash flows from discontinued operating activities related to AMS included the impact of net losses of $705.9 million and $118.6 million for the nine months ended September 30, 2017 and 2016, respectively, and the impact of cash activity related to vaginal mesh cases, which is further described in Note 11. Commitments and Contingencies. Net cash used in discontinued investing activities related to AMS consisted of purchases of property, plant and equipment of $0.1 million for the nine months ended September 30, 2016, with no comparable amount during the nine months ended September 30, 2017. There was no depreciation or amortization during the three and nine months ended September 30, 2017 or 2016 related to AMS.
Astora Restructuring
The Astora wind-down process included a restructuring initiative implemented during the three months ended March 31, 2016, which included a reduction of the Astora workforce consisting of approximately 250 employees.
The Company did not incur any pre-tax charges during the three and nine months ended September 30, 2017 as a result of the Astora restructuring initiative. A summary of expenses related to the Astora restructuring initiative is included below for the three and nine months ended September 30, 2016 (in thousands):
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
Employee separation, retention and other benefit-related costs
$
715

 
$
22,181

Asset impairment charges
—

 
21,328

Contract termination-related items
769

 
10,569

Other wind down costs
285

 
14,315

Total
$
1,769

 
$
68,393

The Company anticipates there will be no significant additional pre-tax restructuring expenses related to this initiative. The majority of these actions were completed as of September 30, 2016 and substantially all cash payments were made by June 30, 2017. These restructuring costs are included in Discontinued operations in the Condensed Consolidated Statements of Operations.

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The liability related to the Astora restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the nine months ended September 30, 2017 were as follows (in thousands):
 
Employee Separation and Other Benefit-Related Costs
 
Contract Termination Charges
 
Total
Liability balance as of January 1, 2017
$
3,855

 
$
1,661

 
$
5,516

Cash distributions
(3,677
)
 
(1,094
)
 
(4,771
)
Liability balance as of September 30, 2017
$
178

 
$
567

 
$
745

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. The Litha purchase agreement contains certain contingencies that are expected to be resolved by June 30, 2018. These contingencies could result in either an increase or a decrease in the purchase price, ranging from up to $11 million of additional consideration received from Acino, or up to $26 million of additional payments to Acino, which would result in an additional gain or loss on the sale, respectively.
The assets and liabilities of Litha are classified as held for sale in the Condensed Consolidated Balance Sheets as of December 31, 2016. Litha was part of the Company’s International Pharmaceuticals segment.
The following table provides the components of Assets and Liabilities held for sale of Litha as of and December 31, 2016 (in thousands):
 
December 31, 2016
Current assets
$
50,167

Property, plant and equipment
3,527

Other intangibles, net
29,950

Other assets
11,343

Assets held for sale
$
94,987

Current liabilities
18,642

Other liabilities
5,696

Liabilities held for sale
$
24,338

Litha does not meet the requirements for treatment as a discontinued operation.
Somar
During the first quarter of 2017, the Company announced that it was assessing strategic alternatives for Grupo Farmacéutico Somar, S.A.P.I. de C.V. and its subsidiaries (collectively, Somar). On June 30, 2017, the Company entered into a definitive agreement to sell 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 assets and liabilities of Somar are classified as held for sale in the Condensed Consolidated Balance Sheets as of September 30, 2017. Somar is part of the Company’s International Pharmaceuticals segment.

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The following table provides the components of Assets and Liabilities held for sale of Somar as of September 30, 2017 (in thousands):
 
September 30, 2017
Current assets
$
64,476

Property, plant and equipment
560

Other assets
529

Assets held for sale
$
65,565

Current liabilities
13,456

Liabilities held for sale
$
13,456

Somar does not meet the requirements for treatment as a discontinued operation.
NOTE 4. RESTRUCTURING
2016 U.S. Generic Pharmaceuticals Restructuring
As part of the ongoing U.S. Generic Pharmaceuticals integration efforts initiated in connection with the acquisition of Par Pharmaceutical Holdings Inc. in September 2015, the Company announced a restructuring initiative in May 2016 to optimize its product portfolio and rationalize its manufacturing sites to expand product margins (the 2016 U.S. Generic Pharmaceuticals restructuring initiative). These measures included certain cost savings initiatives, including a reduction in headcount and the disposal of our Charlotte, North Carolina manufacturing facility (the Charlotte facility). On October 31, 2016, we entered into a definitive agreement to sell the Charlotte facility for cash proceeds of $14 million. The transaction closed in January 2017. The assets of the Charlotte facility were classified as held for sale in the accompanying Condensed Consolidated Balance Sheet as of December 31, 2016.
As a result of the 2016 U.S. Generic Pharmaceuticals restructuring initiative, the Company incurred pre-tax charges of $1.1 million during the nine months ended September 30, 2017. These charges related primarily to employee separation and other benefit-related costs. The Company did not incur charges related to this restructuring initiative during the three months ended September 30, 2017.
The Company incurred pre-tax charges of $13.3 million and $159.5 million during the three and nine months ended September 30, 2016, respectively. These charges consisted of certain intangible asset impairment charges of $100.3 million during the nine months ended September 30, 2016, which were recorded in the first quarter of 2016, and charges to increase excess inventory reserves of $33.3 million during the nine months ended September 30, 2016, which were recorded in the first half of 2016. Also included in these amounts were charges relating to employee separation, retention and other benefit-related costs of $7.0 million and $13.4 million, accelerated depreciation of $3.4 million and $6.8 million and other charges of $3.0 million and $5.7 million during the three and nine months ended September 30, 2016, respectively. These charges are included in the U.S. Generic Pharmaceuticals segment and are included in Asset impairment charges, Cost of revenues and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations. The Company does not expect to incur additional significant expenses related to this restructuring initiative. The Company anticipates substantially all related cash payments will be made by the end of 2017. Under this restructuring initiative, separation costs were expensed ratably over the requisite service period, as applicable.
The liability related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets and is entirely related to employee separation and other benefit-related costs. Changes to this liability during the nine months ended September 30, 2017 were as follows (in thousands):
 
Total
Liability balance as of January 1, 2017
$
9,939

Expenses
1,071

Cash distributions
(10,351
)
Liability balance as of September 30, 2017
$
659


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2016 U.S. Branded Pharmaceutical Restructuring
In December 2016, the Company announced that it was terminating its worldwide license and development agreement with BioDelivery Sciences International, Inc. (BDSI) for BELBUCA™ and returning the product to BDSI. This termination was completed on January 6, 2017. As a result of this announcement and a comprehensive assessment of its product portfolio, the Company restructured its U.S. Branded Pharmaceuticals segment sales organization during the fourth quarter of 2016 (the 2016 U.S. Branded restructuring initiative), which included the elimination of an approximate 375-member U.S. Branded Pharmaceuticals pain field sales force and the termination of certain contracts.
The Company did not incur any significant pre-tax charges during the three and nine months ended September 30, 2017 or 2016 as a result of the 2016 U.S. Branded restructuring initiative. Actions related to this initiative were completed by December 31, 2016 and substantially all of the cash payments are anticipated to be made by the end of 2017. The Company does not expect to incur any additional material pre-tax restructuring expenses related to this initiative.
The liability related to the 2016 U.S. Branded Pharmaceutical restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the nine months ended September 30, 2017 were as follows (in thousands):
 
Employee Separation and Other Benefit-Related Costs
 
Contract Termination Charges
 
Total
Liability balance as of January 1, 2017
$
16,544

 
$
5,224

 
$
21,768

Cash distributions
(16,086
)
 
(5,224
)
 
(21,310
)
Liability balance as of September 30, 2017
$
458

 
$
—

 
$
458

January 2017 Restructuring
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 is intended to further integrate, streamline and optimize the Company’s operations by aligning certain corporate and R&D functions with its recently restructured U.S. Generics Pharmaceutical and U.S. Branded Pharmaceutical 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 U.S. Branded Pharmaceutical R&D functions in Malvern, PA and Chestnut Ridge, NY, a streamlining of general and administrative expenses, an optimization of commercial spend and a refocusing of research and development efforts.
As a result of the January 2017 restructuring initiative, the Company incurred total pre-tax charges of approximately $15.1 million during the nine months ended September 30, 2017 related to employee separation and other benefit-related costs. There were no expenses related to this restructuring initiative for the three months ended September 30, 2017. Of the total charges incurred, $6.9 million are included in the U.S. Branded Pharmaceuticals segment, $4.9 million are included in Corporate unallocated costs and $3.3 million are included in the U.S. Generic Pharmaceuticals segment for nine months ended September 30, 2017, respectively. These charges are 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. Substantially all cash payments are anticipated to be made by the end of 2017 and substantially all of the actions associated with this restructuring were completed by the end of April 2017.
The liability related to the January 2017 restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets and is entirely related to employee separation and other benefit-related costs. Changes to this liability during the nine months ended September 30, 2017 were as follows (in thousands):
 
Total
Liability balance as of January 1, 2017
$
—

Expenses
15,078

Cash distributions
(9,223
)
Liability balance as of September 30, 2017
$
5,855

2017 U.S. Generics Pharmaceuticals Restructuring
On July 21, 2017, the Company announced that after completing a comprehensive review of its manufacturing network, the Company will be ceasing operations and closing its manufacturing and distribution facilities in Huntsville, Alabama (the 2017 U.S. Generics Pharmaceuticals restructuring initiative). The closure of the facilities is expected to occur by the end of 2018.

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As a result of the 2017 U.S. Generics Pharmaceuticals restructuring initiative, the Company’s workforce is expected to be reduced by approximately 815 employees and the Company expects total pre-tax charges related to this initiative to be approximately $325 million, including total estimated cash outlays of approximately $60 million, substantially all of which will be paid by the end of 2018. The estimated restructuring charges consist of accelerated depreciation charges of approximately $155 million, asset impairment charges related to identifiable intangible assets and certain property, plant and equipment of approximately $100 million, charges to increase excess inventory reserves of approximately $10 million, employee separation, retention and other benefit-related costs of approximately $40 million and certain other charges of approximately $20 million. Employee separation, retention and certain other employee benefit-related costs will be expensed ratably over the requisite service period. Other costs including, but not limited to, contract termination fees and product technology transfer costs, will be expensed as incurred.
As a result of the 2017 U.S. Generics Pharmaceuticals restructuring initiative, the Company incurred pretax charges of $94.2 million and $203.7 million during the three and nine months ended September 30, 2017, respectively. These expenses consist of charges relating to accelerated depreciation of $59.8 million during both the three and nine months ended September 30, 2017, employee separation, retention and other benefit-related costs of $19.5 million during both the three and nine months ended September 30, 2017, charges to increase excess inventory reserves of $7.9 million during the nine months ended September 30, 2017, certain intangible asset and property, plant and equipment impairment charges of $14.2 million and $103.7 million during the three and nine months ended September 30, 2017, respectively, and certain other charges of $0.6 million and $12.7 million during the three and nine months ended September 30, 2017, respectively. In the third quarter of 2017, the Company recorded a correcting entry to increase Property, plant and equipment impairment charges resulting from certain assets that should have been impaired during the second quarter of 2017. The pre-tax impact for the three months ended September 30, 2017 includes a correcting adjustment of $14.2 million, which had a corresponding decrease to Property, plant and equipment, net. The Company determined that the impact to the prior period and the current period are not material to the quarterly periods presented and have no impact on 2017 full year results.
These charges are included in the U.S. Generic Pharmaceuticals segment. Intangible asset and property, plant and equipment impairment charges are included in Asset impairment charges, charges to increase excess inventory reserves are included in Cost of revenues, employee separation, retention and other benefit-related costs are included in Cost of revenues and certain other charges are included in both Cost of revenues and Selling, general and administrative expenses in the Condensed Consolidated Statements of Operations.
The liability related to the 2017 U.S. Generics Pharmaceuticals restructuring initiative is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets. Changes to this liability during the nine months ended September 30, 2017 were as follows (in thousands):
 
Employee Separation and Other Benefit-Related Costs
 
Other Restructuring Costs
 
Total
Liability balance as of January 1, 2017
$
—

 
$
—

 
$
—

Expenses
19,535

 
10,576

 
30,111

Cash distributions
(3,227
)
 
(5,607
)
 
(8,834
)
Liability balance as of September 30, 2017
$
16,308

 
$
4,969

 
$
21,277


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NOTE 5. SEGMENT RESULTS
The three reportable business segments in which the Company operates are: (1) U.S. Generic Pharmaceuticals, (2) U.S. Branded Pharmaceuticals and (3) International Pharmaceuticals. These 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; excess costs that will be eliminated pursuant to integration plans; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; certain non-cash interest expense; litigation-related and other contingent matters; gains or losses from early termination of debt; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate general and administrative 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.
The following represents selected information for the Company’s reportable segments for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Net revenues to external customers:
 
 
 
 
 
 
 
U.S. Generic Pharmaceuticals
$
496,654

 
$
533,691

 
$
1,781,949

 
$
1,682,439

U.S. Branded Pharmaceuticals
233,803

 
279,843

 
729,150

 
876,998

International Pharmaceuticals (1)
56,430

 
70,801

 
189,119

 
209,324

Total net revenues to external customers
$
786,887

 
$
884,335

 
$
2,700,218

 
$
2,768,761

 
 
 
 
 
 
 
 
Adjusted income from continuing operations before income tax:
 
 
 
 
 
 
 
U.S. Generic Pharmaceuticals
$
236,767

 
$
228,717

 
$
832,232

 
$
655,453

U.S. Branded Pharmaceuticals
123,754

 
131,615

 
380,841

 
422,816

International Pharmaceuticals
17,434

 
22,077

 
47,128

 
64,446

Total segment adjusted income from continuing operations before income tax
$
377,955

 
$
382,409

 
$
1,260,201

 
$
1,142,715

__________
(1)
Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada, Latin America and, prior to the sale of Litha on July 3, 2017, South Africa.
There were no material revenues from external customers attributed to an individual country outside of the United States during the three and nine months ended September 30, 2017 and 2016. There were no material tangible long-lived assets in an individual country other than the United States as of September 30, 2017 or December 31, 2016.

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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. GAAP, to our total segment adjusted income from continuing operations before income tax for the three and nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Total consolidated loss from continuing operations before income tax
$
(127,796
)
 
$
(145,311
)
 
$
(1,058,647
)
 
$
(518,254
)
Interest expense, net
127,521

 
112,184

 
361,267

 
340,896

Corporate unallocated costs (1)
33,035

 
46,939

 
114,655

 
133,037

Amortization of intangible assets
161,413

 
211,548

 
615,490

 
636,061

Inventory step-up and certain manufacturing costs that will be eliminated pursuant to integration plans
66

 
14,208

 
281

 
111,787

Upfront and milestone payments to partners
775

 
1,770

 
6,952

 
5,875

Separation benefits and other cost reduction initiatives (2)
80,693

 
9,782

 
127,977

 
70,412

Impact of VOLTAREN® Gel generic competition
—

 
—

 
—

 
(7,750
)
Certain litigation-related and other contingencies, net (3)
(12,352
)
 
18,256

 
(14,016
)
 
28,715

Asset impairment charges (4)
94,924

 
93,504

 
1,023,930

 
263,080

Acquisition-related and integration items (5)
16,641

 
19,476

 
31,711

 
80,201

Loss on extinguishment of debt
—

 
—

 
51,734

 
—

Foreign currency impact related to the remeasurement of intercompany debt instruments
3,005

 
(114
)
 
(2,922
)
 
1,558

Other, net
30

 
167

 
1,789

 
(2,903
)
Total segment adjusted income from continuing operations before income tax
$
377,955

 
$
382,409

 
$
1,260,201

 
$
1,142,715

__________
(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 $19.8 million and $41.3 million, accelerated depreciation of $59.8 million and $60.2 million, other charges of $1.1 million and $18.5 million related primarily to the 2017 U.S. Generics Pharmaceuticals restructuring initiative during the three and nine months ended September 30, 2017, respectively, and charges to increase excess inventory reserves of $7.9 million during the nine months ended September 30, 2017. Amounts during the three and nine months ended September 30, 2016 include decreases of excess inventory reserves of $9.0 million and increases of excess inventory reserves of $24.3 million, respectively, primarily related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative. The adjustment for the three months ended September 30, 2016 resulted from the sell-through of certain inventory previously reserved. In addition, employee separation costs of $14.8 million and $30.0 million and other restructuring costs of $3.9 million and $16.1 million were recorded for the three and nine months ended September 30, 2016, respectively. 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 11. Commitments and Contingencies.
(4)
Amounts primarily relate to charges to write down goodwill and intangible assets as further described in Note 8. Goodwill and Other Intangibles as well as charges to write down certain property, plant and equipment as further described in Note 6. Fair Value Measurements and Note 4. Restructuring.
(5)
Amounts during the three and nine months ended September 30, 2017 include costs directly associated with previous acquisitions of $1.2 million and $8.1 million, respectively, and charges due to changes in fair value of contingent consideration of $15.4 million and $23.6 million, respectively. Amounts during the three and nine months ended September 30, 2016 include costs directly associated with previous acquisitions of $7.9 million and $55.4 million, respectively, and charges due to changes in fair value of contingent consideration of $11.6 million and $24.8 million, respectively.
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
NOTE 6. 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.

15
Table of Contents

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 September 30, 2017 and December 31, 2016.
At the time of purchase, we classify our marketable securities as either available-for-sale securities or trading securities, depending on our intent at that time. Available-for-sale and trading securities are carried at fair value with unrealized holding gains and losses recorded within other comprehensive income or net income, respectively. The Company reviews any unrealized losses associated with available-for-sale securities to determine the classification as a “temporary” or “other-than-temporary” impairment. A temporary impairment results in an unrealized loss being recorded in other comprehensive income. An impairment that is viewed as other-than-temporary is recognized in net income. The Company considers various factors in determining the classification, including the length of time and extent to which the fair value has been less than the Company’s cost basis, the financial condition and near-term prospects of the issuer or investee, and the Company’s ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.
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.
Recurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2017 and December 31, 2016 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
September 30, 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
$
436,178

 
$
—

 
$
—

 
$
436,178

Time deposits
—

 
70,209

 
—

 
70,209

Equity securities
2,789

 
—

 
—

 
2,789

Total
$
438,967

 
$
70,209

 
$
—

 
$
509,176

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

 
$
—

 
$
81,407

 
$
81,407

Acquisition-related contingent consideration—long-term
—

 
—

 
113,380

 
113,380

Total
$
—

 
$
—

 
$
194,787

 
$
194,787

At September 30, 2017, money market funds include $33.1 million in QSFs to be disbursed to mesh-related product liability claimants. See Note 11. Commitments and Contingencies for further discussion of our product liability cases.

16
Table of Contents

 
Fair Value Measurements at Reporting Date using:
December 31, 2016
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
$
26,210

 
$
—

 
$
—

 
$
26,210

Time deposits
—

 
100,000

 
—

 
100,000

Equity securities
2,267

 
—

 
—

 
2,267

Total
$
28,477

 
$
100,000

 
$
—

 
$
128,477

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

 
$
—

 
$
109,373

 
$
109,373

Acquisition-related contingent consideration—long-term
—

 
—

 
152,740

 
152,740

Total
$
—

 
$
—

 
$
262,113

 
$
262,113

At December 31, 2016, money market funds include $26.2 million in QSFs to be disbursed to mesh-related product liability claimants. See Note 11. Commitments and Contingencies for further discussion of our product liability cases.
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 nine months ended September 30, 2017 and 2016 (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Beginning of period
$
210,460

 
$
135,796

 
$
262,113

 
$
143,502

Amounts acquired
—

 
146,866

 
—

 
146,866

Amounts settled
(31,617
)
 
(8,121
)
 
(91,927
)
 
(30,242
)
Changes in fair value recorded in earnings
15,440

 
11,585

 
23,574

 
24,790

Effect of currency translation
504

 
(329
)
 
1,027

 
881

End of period
$
194,787

 
$
285,797

 
$
194,787

 
$
285,797

The fair value measurements of the contingent consideration obligations at September 30, 2017 were determined using risk-adjusted discount rates ranging from 3% to 22%. 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 nine months ended September 30, 2017 by acquisition (in thousands):
 
Balance as of December 31, 2016
 
Acquisitions
 
Fair Value Adjustments and Accretion
 
Payments and Other
 
Balance as of September 30, 2017
Auxilium acquisition
$
21,097

 
$
—

 
$
(1,501
)
 
$
(6,295
)
 
$
13,301

Lehigh Valley Technologies, Inc. acquisitions
96,000

 
—

 
27,791

 
(55,192
)
 
68,599

VOLTAREN® Gel acquisition
118,395

 
—

 
7,178

 
(28,656
)
 
96,917

Other
26,621

 
—

 
(9,894
)
 
(757
)
 
15,970

Total
$
262,113

 
$
—

 
$
23,574

 
$
(90,900
)
 
$
194,787


17
Table of Contents

The following is a summary of available-for-sale securities held by the Company at September 30, 2017 and December 31, 2016 (in thousands):
 
Available-for-sale
September 30, 2017
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
Money market funds
$
436,178

 
$
—

 
$
—

 
$
436,178

Total included in cash and cash equivalents
$
403,081

 
$
—

 
$
—

 
$
403,081

Total included in restricted cash and cash equivalents
$
33,097

 
$
—

 
$
—

 
$
33,097

Equity securities
$
1,766

 
$
1,023

 
$
—

 
$
2,789

Long-term available-for-sale securities
$
1,766

 
$
1,023

 
$
—

 
$
2,789

 
Available-for-sale
December 31, 2016
Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized (Losses)
 
Fair Value
Money market funds
$
26,210

 
$
—

 
$
—

 
$
26,210

Total included in cash and cash equivalents
$
—

 
$
—

 
$
—

 
$
—

Total included in restricted cash and cash equivalents
$
26,210

 
$
—

 
$
—

 
$
26,210

Equity securities
$
1,766

 
$
501

 
$
—

 
$
2,267

Long-term available-for-sale securities
$
1,766

 
$
501

 
$
—

 
$
2,267

Nonrecurring Fair Value Measurements
The Company’s financial assets and liabilities measured at fair value on a nonrecurring basis during the nine months ended September 30, 2017 were as follows (in thousands):
 
Fair Value Measurements at Reporting Date using:
 
Total Expense for the Nine Months Ended September 30, 2017
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Assets:
 
 
 
 
 
 
 
Certain U.S. Branded Pharmaceuticals intangible assets (Note 8)
$
—

 
$
—

 
$
34,326

 
$
(76,196
)
Certain U.S. Generic Pharmaceuticals intangible assets (Note 8)
—

 
—

 
396,974

 
(452,623
)
Certain International Pharmaceuticals intangible assets (Note 8)
—

 
—

 
21,772

 
(145,359
)
Certain property, plant and equipment (1)
—

 
—

 
—

 
(61,008
)
Total
$
—

 
$
—

 
$
453,072

 
$
(735,186
)
__________
(1)
Amounts relate primarily to an aggregate charge of $46.2 million recorded in connection with the 2017 U.S. Generics Pharmaceuticals restructuring initiative, which is described further in Note 4. Restructuring, and $11.9 million recorded following the initiation of held-for-sale accounting resulting from the Company’s June 30, 2017 definitive agreement to sell Somar, which is described in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale.
Additionally, the Company recorded aggregate goodwill impairment charges during the nine months ended September 30, 2017 of $288.7 million. Refer to Note 8. Goodwill and Other Intangibles for further description of the impairment charges taken, including the valuation methodologies utilized.
NOTE 7. INVENTORIES
Inventories consist of the following at September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
December 31, 2016
Raw materials (1)
$
144,885

 
$
175,240

Work-in-process (1)
99,316

 
100,494

Finished goods (1)
199,069

 
279,937

Total
$
443,270

 
$
555,671

__________
(1) The components of inventory shown in the table above are net of allowance for obsolescence.

18

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 September 30, 2017 and December 31, 2016, $20.8 million and $22.9 million, respectively, of long-term inventory was included in Other assets in the Condensed Consolidated Balance Sheets. As of September 30, 2017 and December 31, 2016, the Company’s Condensed Consolidated Balance Sheets included approximately $6.0 million and $16.8 million, respectively, of capitalized pre-launch inventories related to generic products that were not yet available to be sold.
NOTE 8. GOODWILL AND OTHER INTANGIBLES
Goodwill
Changes in the carrying amount of our goodwill for the nine months ended September 30, 2017 were as follows (in thousands):
 
Carrying Amount
 
U.S. Generic Pharmaceuticals
 
U.S. Branded Pharmaceuticals
 
International Pharmaceuticals
 
Total
Goodwill as of December 31, 2016
$
3,531,301

 
$
1,009,248

 
$
188,846

 
$
4,729,395

Effect of currency translation on gross balance
—

 
—

 
47,477

 
47,477

Effect of currency translation on accumulated impairment
—

 
—

 
(37,330
)
 
(37,330
)
Goodwill impairment charges
—

 
(180,430
)
 
(108,314
)
 
(288,744
)
Goodwill as of September 30, 2017
$
3,531,301

 
$
828,818

 
$
90,679

 
$
4,450,798


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Table of Contents

The carrying amounts of goodwill at September 30, 2017 and December 31, 2016 are net of the following accumulated impairments:
 
Accumulated Impairment
 
U.S. Generic Pharmaceuticals
 
U.S. Branded Pharmaceuticals
 
International Pharmaceuticals
 
Total
Accumulated impairment losses as of December 31, 2016
$
2,342,549

 
$
675,380

 
$
408,280

 
$
3,426,209

Accumulated impairment losses as of September 30, 2017 (1)
$
2,342,549

 
$
855,810

 
$
527,614

 
$
3,725,973

__________
(1)
During the nine months ended September 30, 2017, we sold our Litha business. Accordingly, we removed $26.3 million of accumulated impairments from the International Pharmaceuticals segment.
Other Intangible Assets
Changes in the amount of other intangible assets for the nine months ended September 30, 2017 are set forth in the table below (in thousands). This table excludes changes related to businesses classified as held for sale, to the extent such changes occurred after the business was classified as held for sale. As such, this table excludes asset impairment charges of $9.6 million related to our Litha business, assets derecognized upon the divestitures of Litha and BELBUCA™ with a combined carrying amount of $26.4 million and net increases resulting from currency translation of $1.5 million related to our Litha and Somar businesses.
Cost basis:
Balance as of December 31, 2016
 
Acquisitions
 
Impairments
(1)
 
Other
(1) (2)
 
Effect of Currency Translation
(1)
 
Balance as of September 30, 2017
Indefinite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
In-process research and development
$
1,123,581

 
$
—

 
$
(222,090
)
 
$
(177,200
)
 
$
209

 
$
724,500

Total indefinite-lived intangibles
$
1,123,581

 
$
—

 
$
(222,090
)
 
$
(177,200
)
 
$
209

 
$
724,500

Finite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Licenses (weighted average life of 12 years)
$
465,720

 
$
—

 
$
(8,178
)
 
$
—

 
$
—

 
$
457,542

Tradenames (weighted average life of 12 years)
7,345

 
—

 
(808
)
 
(262
)
 
134

 
6,409

Developed technology (weighted average life of 11 years)
6,223,004

 
—

 
(433,456
)
 
127,037

 
34,893

 
5,951,478

Total finite-lived intangibles (weighted average life of 11 years)
$
6,696,069

 
$
—

 
$
(442,442
)
 
$
126,775

 
$
35,027

 
$
6,415,429

Total other intangibles
$
7,819,650

 
$
—

 
$
(664,532
)
 
$
(50,425
)
 
$
35,236

 
$
7,139,929

 
 
 
 
 
 
 
 
 
 
 
 
Accumulated amortization:
Balance as of December 31, 2016
 
Amortization
 
Impairments
 
Other
(2)
 
Effect of Currency Translation
 
Balance as of September 30, 2017
Finite-lived intangibles:
 
 
 
 
 
 
 
 
 
 
 
Licenses
$
(341,600
)
 
$
(21,674
)
 
$
—

 
$
—

 
$
—

 
$
(363,274
)
Tradenames
(6,599
)
 
(42
)
 
—

 
262

 
(30
)
 
(6,409
)
Developed technology
(1,612,154
)
 
(593,774
)
 
—

 
50,163

 
(12,104
)
 
(2,167,869
)
Total other intangibles
$
(1,960,353
)
 
$
(615,490
)
 
$
—

 
$
50,425

 
$
(12,134
)
 
$
(2,537,552
)
Net other intangibles
$
5,859,297

 
 
 
 
 
 
 
 
 
$
4,602,377

__________
(1)
Additional information on the changes in the total gross carrying amount of our other intangible assets is presented below (in thousands):
 
Gross Carrying Amount
December 31, 2016
$
7,819,650

Impairment of certain U.S. Branded Pharmaceuticals intangible assets
(76,196
)
Impairment of certain U.S. Generic Pharmaceuticals intangible assets
(452,623
)
Impairment of certain International Pharmaceuticals intangible assets
(135,713
)
Transfer of intangible assets to Assets held for sale (NOTE 3)
(33,304
)
Removal of fully amortized intangible assets relating to expired or terminated licensing agreements
(17,121
)
Effect of currency translation
35,236

September 30, 2017
$
7,139,929


20
Table of Contents

(2)
Includes reclassification adjustments of $177.2 million for certain developed technology intangible assets, previously classified as in-process research and development, that were placed in service during the nine months ended September 30, 2017, the removal of fully amortized intangible assets relating to expired or terminated licensing agreements and the transfer of Somar intangible assets to Assets held for sale.
Amortization expense for the three and nine months ended September 30, 2017 totaled $161.4 million and $615.5 million, respectively. Amortization expense for the three and nine months ended September 30, 2016 totaled $211.5 million and $636.1 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, 2016 is as follows (in thousands):
2017
$
770,341

2018
$
550,784

2019
$
469,602

2020
$
438,638

2021
$
423,931

Impairments
As part of the Company’s goodwill and intangible asset impairment assessments, the Company estimates the fair values of its reporting units and its 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 the Company’s 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, 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. The Company believes 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 on the Company’s Condensed Consolidated Statements of Operations.
A summary of significant goodwill and other intangible asset impairment charges by reportable segment for the nine months ended September 30, 2017 and 2016 is included below.
U.S. Generic Pharmaceuticals Segment
During each of the first three quarters of 2017, the Company identified certain market conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in its U.S. Generic Pharmaceuticals segment. Accordingly, the Company tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $72.7 million, $268.2 million and $54.2 million during the three months ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively.
In addition, 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%. The goodwill balance for the Company’s Generics reporting unit was approximately $3,531 million as of September 30, 2017.
During the first and second quarters of 2016, the Company identified certain market and regulatory conditions impacting the recoverability of certain indefinite and finite-lived intangible assets in our U.S. Generic Pharmaceuticals segment. Accordingly, we tested these assets for impairment and determined that the carrying amounts of certain of these assets was no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges of $29.3 million and $40.0 million during the first and second quarters of 2016, respectively. The Company also recognized pre-tax, non-cash asset impairment charges of $100.3 million during the first quarter of 2016 related to the 2016 U.S. Generic Pharmaceuticals restructuring initiative, which resulted from the discontinuation of certain commercial products and the abandonment of certain in-process research and development (IPR&D) projects. See Note 4. Restructuring for discussion of our material restructuring initiatives.

21
Table of Contents

U.S. Branded Pharmaceuticals Segment
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, we determined that the carrying amount of our 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. In addition, during the second and third quarters of 2017, we identified certain market conditions impacting the recoverability of certain other finite-lived intangible assets in our U.S. Branded Pharmaceuticals segment. Accordingly, we tested these assets for impairment and determined that their carrying amounts were no longer fully recoverable, resulting in pre-tax, non-cash asset impairment charges totaling $31.5 million and $24.1 million during the three months ended June 30, 2017 and September 30, 2017, respectively.
In addition, as a result of the actions taken with respect to OPANA® ER and the continued erosion of the Company’s U.S. Branded Pharmaceuticals segment’s Established Products portfolio, the Company initiated an interim goodwill impairment analysis of its Branded reporting unit during the second quarter of 2017. Based on the provisions of ASU 2017-04, which the Company adopted as of January 1, 2017, the Company recorded a pre-tax, non-cash asset 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. The Company estimated the fair value of the Branded reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Branded goodwill impairment test was 9.5%. The remaining goodwill for the Company’s Branded reporting unit was approximately $829 million as of September 30, 2017.
As a result of unfavorable formulary changes and generic competition for sumatriptan, the Company experienced a downturn in the performance of its SUMAVEL® DOSEPRO® product, a needle-free delivery system for sumatriptan acquired from Zogenix, Inc. in 2014. As a result of this underperformance, the Company concluded during the third quarter of 2016 that an impairment assessment was required to evaluate the recoverability of SUMAVEL® DOSEPRO®. After performing this assessment, we recorded a pre-tax, non-cash impairment charge of $72.8 million during the third quarter of 2016, representing the remaining carrying amount.
International Pharmaceuticals Segment
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 III study of serelaxin in patients with AHF failed to meet its primary endpoints. As a result, Endo has concluded that the full carrying amount of its serelaxin in-process research and development intangible asset is 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, the Company assessed the recoverability of its Paladin goodwill balance and determined that the estimated fair value of the Paladin reporting unit was below its carrying amount. The Company recorded a pre-tax, non-cash asset 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. The Company estimated the fair value of the Paladin reporting unit using an income approach that utilizes a discounted cash flow model. The discount rate applied to the estimated cash flows for our Paladin goodwill impairment test was 10.0%. The remaining goodwill for the Company’s Paladin reporting unit was approximately $91 million as of September 30, 2017.
As further discussed in Note 3. Discontinued Operations and Assets and Liabilities Held for Sale, the Company 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, the Company performed an impairment analysis using a market approach and determined that impairment charges were required. The Company 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.
During the three months ended September 30, 2016, the Company determined that it would not pursue commercialization of a product in certain international markets. Accordingly, we tested the finite-lived intangible asset associated with this product for impairment and determined that the carrying value was no longer fully recoverable, resulting in a pre-tax, non-cash asset impairment charge of $16.2 million during the third quarter of 2016.

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NOTE 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include the following at September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
December 31, 2016
Trade accounts payable
$
89,685

 
$
126,712

Returns and allowances
293,285

 
332,455

Rebates
181,972

 
227,706

Chargebacks
14,284

 
33,092

Accrued interest
64,109

 
128,254

Accrued payroll and related benefits
92,363

 
115,224

Accrued royalties and other distribution partner payables
66,558

 
191,433

Acquisition-related contingent consideration—short-term
81,407

 
109,373

Other
213,522

 
189,835

Total
$
1,097,185


$
1,454,084

NOTE 10. DEBT
The following table presents information about the Company’s total indebtedness at September 30, 2017 and December 31, 2016 (in thousands):
 
September 30, 2017
 
December 31, 2016
 
Effective Interest Rate
 
Principal Amount
 
Carrying Amount
 
Effective Interest Rate
 
Principal Amount
 
Carrying Amount
7.25% Senior Notes due 2022
7.91
%
 
$
400,000

 
$
390,504

 
7.91
%
 
$
400,000

 
$
389,150

5.75% Senior Notes due 2022
6.04
%
 
700,000

 
692,467

 
6.04
%
 
700,000

 
691,339

5.375% Senior Notes due 2023
5.62
%
 
750,000

 
741,712

 
5.62
%
 
750,000

 
740,733

6.00% Senior Notes due 2023
6.28
%