UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________________________________________________________________
FORM 10-Q
____________________________________________________________________________________________
(Mark One)
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2021
or
FOR THE TRANSITION PERIOD FROM TO
Commission File Number: 001-36326
____________________________________________________________________________________________
(Exact name of registrant as specified in its charter)
____________________________________________________________________________________________
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of Principal Executive Offices) | (Zip Code) | |||||||
011-353 -1-268-2000
(Registrant’s telephone number, including area code)
| 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. | ☒ | |||||||
| No | ☐ | |||||||
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). | ☒ | |||||||
| No | ☐ | |||||||
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. | ||||||||||||||
☒ | Accelerated filer | ☐ | ||||||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
Emerging growth company | ||||||||||||||
| 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. | ☐ | ||||||||||
| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). | Yes | |||||||
| No | ☒ | |||||||
Securities registered pursuant to Section 12(b) of the Exchange Act: | ||||||||
| Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||||||
The number of ordinary shares, nominal value $0.0001 per share outstanding as of October 28, 2021 was | ||
ENDO INTERNATIONAL PLC
INDEX
| Page | ||||||||
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). Forward-looking statements include, without limitation, any statements relating to the status and outcome of litigation, any future financial results, cost savings, revenues, expenses, net income and income per share, as well as future financing activities, the impact of the novel strain of coronavirus referred to as COVID-19 on the health and welfare of our employees and on our business (including any response to COVID-19 such as anticipated return to historical purchasing decisions by customers, the economic impact of COVID-19, changes in consumer spending, decisions to engage in certain medical procedures, future governmental orders that could impact our operations and the ability of our manufacturing facilities and suppliers to fulfill their obligations to us), the outcome or progress of our contingency planning, including any potential bankruptcy filing, and any other statements that refer to Endo’s expected, estimated or anticipated future results. We have tried, whenever possible, to identify such statements with words such as “believe,” “expect,” “anticipate,” “intend,” “estimate,” “plan,” “project,” “forecast,” “will,” “may” or similar expressions. We have based these forward-looking statements on our current expectations, assumptions 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 including, without limitation, the risks related to the impact of COVID-19 (such as, without limitation, the scope and duration of the pandemic and the resulting economic crisis and levels of unemployment, governmental actions and restrictive measures implemented in response, material delays and cancellations of certain medical procedures, potential manufacturing and supply chain disruptions and other potential impacts to our business as a result of COVID-19); the timing or results of any pending or future litigation, investigations or claims or actual or contingent liabilities, settlement discussions, negotiations or other adverse proceedings, including proceedings involving opioid-related matters, tax matters with the United States (U.S.) Internal Revenue Service (IRS) and key products such as VASOSTRICT®; unfavorable publicity regarding the misuse of opioids; changing competitive, market and regulatory conditions; changes in legislation; our ability to obtain and maintain adequate protection for our intellectual property rights; the timing and uncertainty of the results of both the research and development and regulatory processes, including regulatory decisions, product recalls, withdrawals and other unusual items; domestic and foreign health care and cost containment reforms, including government pricing, tax and reimbursement policies; technological advances and patents obtained by competitors; the performance, including the approval, introduction and consumer and physician acceptance of new products and the continuing acceptance of currently marketed products; the effectiveness of advertising and other promotional campaigns; the timely and successful implementation of any strategic and/or optimization initiatives; the uncertainty associated with the identification of and successful consummation and execution of external corporate development initiatives and strategic partnering transactions; our ability to obtain and successfully manufacture, maintain and distribute a sufficient supply of products to meet market demand in a timely manner; the timing and uncertainty of the results of our strategic review and any related potential bankruptcy; and the other risks and uncertainties more fully described under the caption “Risk Factors” in Part I, Item 1A of the Annual Report on Form 10-K for the year ended December 31, 2020 filed with the Securities and Exchange Commission (SEC) on February 26, 2021 (the Annual Report), in Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021 filed with the SEC on May 7, 2021 (the First Quarter 2021 Form 10-Q), in Part II, Item 1A of the Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2021 filed with the SEC on August 6, 2021 (the Second Quarter 2021 Form 10-Q), in Part II, Item 1A of this report and in other reports that we file with the SEC. These risks and uncertainties, many of which are outside of our control, and any other risks and uncertainties that we are not currently able to predict or identify, individually or in the aggregate, could have a material adverse effect on our business, financial condition, results of operations and cash flows and could cause our actual results to differ materially and adversely from those expressed in forward-looking statements contained or referenced in this document, including with respect to opioid-related proceedings or any other litigation; our ability to adjust to changing market conditions; our ability to attract and retain key personnel; our ability to maintain compliance with our financial obligations under certain of our outstanding debt obligations and avoid related downgrades of our debt and long-term corporate credit ratings (which could increase our cost of capital) and/or potential events of default (if not cured or waived) under financial and operating covenants contained in our or our subsidiaries’ outstanding indebtedness; our ability to incur additional borrowings in compliance with the covenants in our then-existing facilities or to obtain additional debt or equity financing for working capital, capital expenditures, business development, debt service requirements, acquisitions or general corporate or other purposes, or to refinance our indebtedness; and/or the potential for a significant reduction in our short-term and long-term revenues and/or any other factor that could cause us to be unable to fund our operations and liquidity needs, such as future capital expenditures and payment of our indebtedness. As a result of the possibility or occurrence of any such result, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning could ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. Those remedial measures could include a potential bankruptcy filing which, if it were to occur, would subject us to additional risks and uncertainties that could adversely affect our business prospects and ability to continue as a going concern, as further described in Part II, Item 1A. “Risk Factors” herein. We would, in that event, also be subject to risks and uncertainties caused by the actions of creditors and other third parties with interests that may be inconsistent with our plans.
i
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 laws. You are advised to consult any further disclosures we make on related subjects in our reports filed with the 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 the Annual Report, Part II, Item 1A of the First Quarter 2021 Form 10-Q, Part II, Item 1A of the Second Quarter 2021 Form 10-Q and Part II, Item 1A of this report, 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.
ii
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands, except share and per share data)
| September 30, 2021 | December 31, 2020 | ||||||||||
| ASSETS | |||||||||||
| CURRENT ASSETS: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Restricted cash and cash equivalents | |||||||||||
| Accounts receivable, net | |||||||||||
| Inventories, net | |||||||||||
| Prepaid expenses and other current assets | |||||||||||
| Income taxes receivable | |||||||||||
| Assets held for sale (NOTE 3) | |||||||||||
| Total current assets | $ | $ | |||||||||
| PROPERTY, PLANT AND EQUIPMENT, NET | |||||||||||
| OPERATING LEASE ASSETS | |||||||||||
| GOODWILL | |||||||||||
| OTHER INTANGIBLES, NET | |||||||||||
| DEFERRED INCOME TAXES | |||||||||||
| OTHER ASSETS | |||||||||||
| TOTAL ASSETS | $ | $ | |||||||||
| LIABILITIES AND SHAREHOLDERS’ DEFICIT | |||||||||||
| CURRENT LIABILITIES: | |||||||||||
| Accounts payable and accrued expenses | $ | $ | |||||||||
| Current portion of legal settlement accrual | |||||||||||
| Current portion of operating lease liabilities | |||||||||||
| Current portion of long-term debt | |||||||||||
| Liabilities held for sale (NOTE 3) | |||||||||||
| Total current liabilities | $ | $ | |||||||||
| DEFERRED INCOME TAXES | |||||||||||
| LONG-TERM DEBT, LESS CURRENT PORTION, NET | |||||||||||
| OPERATING LEASE LIABILITIES, LESS CURRENT PORTION | |||||||||||
| OTHER LIABILITIES | |||||||||||
| COMMITMENTS AND CONTINGENCIES (NOTE 13) | |||||||||||
| SHAREHOLDERS’ DEFICIT: | |||||||||||
Euro deferred shares, $ | |||||||||||
Ordinary shares, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Accumulated deficit | ( | ( | |||||||||
| Accumulated other comprehensive loss | ( | ( | |||||||||
| Total shareholders’ deficit | $ | ( | $ | ( | |||||||
| TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||
1
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars and shares in thousands, except per share data)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| TOTAL REVENUES, NET | $ | $ | $ | $ | |||||||||||||||||||
| COSTS AND EXPENSES: | |||||||||||||||||||||||
| Cost of revenues | |||||||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research and development | |||||||||||||||||||||||
| Litigation-related and other contingencies, net | ( | ||||||||||||||||||||||
| Asset impairment charges | |||||||||||||||||||||||
| Acquisition-related and integration items, net | ( | ( | ( | ||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| INCOME TAX EXPENSE (BENEFIT) | ( | ||||||||||||||||||||||
| (LOSS) INCOME FROM CONTINUING OPERATIONS | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| DISCONTINUED OPERATIONS, NET OF TAX (NOTE 3) | ( | ( | ( | ( | |||||||||||||||||||
| NET (LOSS) INCOME | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| NET (LOSS) INCOME PER SHARE—BASIC: | |||||||||||||||||||||||
| Continuing operations | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Discontinued operations | ( | ( | ( | ( | |||||||||||||||||||
| Basic | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| NET (LOSS) INCOME PER SHARE—DILUTED: | |||||||||||||||||||||||
| Continuing operations | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| Discontinued operations | ( | ( | ( | ( | |||||||||||||||||||
| Diluted | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| WEIGHTED AVERAGE SHARES: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||||||||||||||
2
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(Dollars in thousands)
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| NET (LOSS) INCOME | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
| OTHER COMPREHENSIVE (LOSS) INCOME: | |||||||||||||||||||||||
| Net unrealized (loss) gain on foreign currency | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| Total other comprehensive (loss) income | $ | ( | $ | $ | $ | ( | |||||||||||||||||
| COMPREHENSIVE (LOSS) INCOME | $ | ( | $ | ( | $ | ( | $ | ||||||||||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||||||||||||||
3
ENDO INTERNATIONAL PLC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| OPERATING ACTIVITIES: | |||||||||||
| Net (loss) income | $ | ( | $ | ||||||||
| Adjustments to reconcile Net (loss) income to Net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Share-based compensation | |||||||||||
| Amortization of debt issuance costs and discount | |||||||||||
| Deferred income taxes | ( | ( | |||||||||
| Change in fair value of contingent consideration | ( | ||||||||||
| Loss on extinguishment of debt | |||||||||||
| Acquired in-process research and development charges | |||||||||||
| Asset impairment charges | |||||||||||
| Loss (gain) on sale of business and other assets | ( | ||||||||||
| Changes in assets and liabilities which (used) provided cash: | |||||||||||
| Accounts receivable | ( | ( | |||||||||
| Inventories | ( | ||||||||||
| Prepaid and other assets | ( | ||||||||||
| Accounts payable, accrued expenses and other liabilities | ( | ||||||||||
| Income taxes payable/receivable, net | ( | ||||||||||
| Net cash provided by operating activities | $ | $ | |||||||||
| INVESTING ACTIVITIES: | |||||||||||
| Capital expenditures, excluding capitalized interest | ( | ( | |||||||||
| Capitalized interest payments | ( | ( | |||||||||
| Acquisitions, including in-process research and development, net of cash and restricted cash acquired | ( | ||||||||||
| Product acquisition costs and license fees | ( | ( | |||||||||
| Proceeds from sale of business and other assets, net | |||||||||||
| Net cash used in investing activities | $ | ( | $ | ( | |||||||
4
| Nine Months Ended September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| FINANCING ACTIVITIES: | |||||||||||
| Proceeds from issuance of notes, net | |||||||||||
| Proceeds from issuance of term loans, net | |||||||||||
| Repayments of notes | ( | ||||||||||
| Repayments of term loans | ( | ( | |||||||||
| Repayments of other indebtedness | ( | ( | |||||||||
| Payments for debt issuance and extinguishment costs | ( | ||||||||||
| Payments for contingent consideration | ( | ( | |||||||||
| Payments of tax withholding for restricted shares | ( | ( | |||||||||
| Proceeds from exercise of options | |||||||||||
| Net cash used in financing activities | $ | ( | $ | ( | |||||||
| Effect of foreign exchange rate | ( | ||||||||||
| NET INCREASE IN CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS | $ | $ | |||||||||
| CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, BEGINNING OF PERIOD | |||||||||||
| CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS, END OF PERIOD | $ | $ | |||||||||
| SUPPLEMENTAL INFORMATION: | |||||||||||
| Cash paid into Qualified Settlement Funds for mesh legal settlements | $ | $ | |||||||||
| Cash paid out of Qualified Settlement Funds for mesh legal settlements | $ | $ | |||||||||
| Other cash distributions for mesh legal settlements | $ | $ | |||||||||
See accompanying Notes to Condensed Consolidated Financial Statements. | |||||||||||
5
ENDO INTERNATIONAL PLC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021
NOTE 1. BASIS OF PRESENTATION
Endo International plc is an Ireland-domiciled specialty pharmaceutical company that conducts business through its operating subsidiaries. Unless otherwise indicated or required by the context, references throughout to “Endo,” the “Company,” “we,” “our” or “us” refer to 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 U.S. generally accepted accounting principles (U.S. GAAP) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X of the SEC for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. 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, 2021 and the results of its operations and its cash flows for the periods presented. Operating results for the three and nine months ended September 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021. The year-end Condensed Consolidated Balance Sheet data as of December 31, 2020 was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
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 the Annual Report.
Certain prior period amounts have been reclassified to conform to the current period presentation.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of our Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the amounts and disclosures in our Condensed Consolidated Financial Statements, including the Notes thereto, and elsewhere in this report. For example, we are required to make significant estimates and assumptions related to revenue recognition, including sales deductions, long-lived assets, goodwill, other intangible assets, income taxes, contingencies, financial instruments and share-based compensation, among others. Some of these estimates can be subjective and complex. Uncertainties related to the continued magnitude and duration of the COVID-19 pandemic, the extent to which it will impact our estimated future financial results, worldwide macroeconomic conditions including interest rates, employment rates, consumer spending, health insurance coverage, the speed of the anticipated recovery and governmental and business reactions to the pandemic, including any possible re-initiation of shutdowns or renewed restrictions, have increased the complexity of developing these estimates, including the allowance for expected credit losses and the carrying amounts of long-lived assets, goodwill and other intangible assets. Furthermore, as a result of the possibility or occurrence of an unfavorable outcome with respect to any legal proceeding, we have engaged in and, at any given time, may further engage in strategic reviews of all or a portion of our business. Any such review or contingency planning could ultimately result in our pursuing one or more significant corporate transactions or other remedial measures, including on a preventative or proactive basis. These actions could include a bankruptcy filing which could ultimately result in, among other things, asset impairment charges that may be material. Although we believe that our estimates and assumptions are reasonable, there may be other reasonable estimates or assumptions that differ significantly from ours. Further, our estimates and assumptions are based upon information available at the time they were made. Actual results may differ significantly from our estimates, including as a result of the items noted above or other uncertainties.
Significant Accounting Policies Added or Updated since December 31, 2020
There have been no significant changes to our significant accounting policies since December 31, 2020. For additional discussion of the Company’s significant accounting policies, see Note 2. Summary of Significant Accounting Policies in the Consolidated Financial Statements included in Part IV, Item 15 of the Annual Report.
6
NOTE 3. DISCONTINUED OPERATIONS AND HELD FOR SALE
Astora
The operating results of the Company’s Astora business, which the board of directors (the Board) resolved to wind down in 2016, are reported as Discontinued operations, net of tax in the Condensed Consolidated Statements of Operations for all periods presented. The following table provides the operating results of Astora Discontinued operations, net of tax, for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Litigation-related and other contingencies, net | $ | $ | $ | $ | |||||||||||||||||||
| Loss from discontinued operations before income taxes | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Income tax benefit | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
| Discontinued operations, net of tax | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Loss from discontinued operations before income taxes includes Litigation-related and other contingencies, net, mesh-related legal defense costs and certain other items.
The cash flows from discontinued operating activities related to Astora included the impact of net losses of $38.8 million and $41.6 million for the nine months ended September 30, 2021 and 2020, respectively, and the impact of cash activity related to vaginal mesh cases. During the periods presented above, there were no no
Certain Assets and Liabilities of Endo’s Retail Generics Business
As previously disclosed, in November 2020, we announced the initiation of several strategic actions to further optimize the Company’s operations and increase overall efficiency, which are collectively referred to as the 2020 Restructuring Initiative and are further discussed in Note 4. Restructuring. These actions include an initiative to exit certain of our manufacturing and other sites to optimize our retail generics business cost structure. As part of this initiative, during the third quarter of 2021, we entered into definitive agreements to sell certain assets related to our retail generics business, as well as certain associated liabilities, to subsidiaries of Strides Pharma Science Limited (Strides) and certain other entities. Certain of the sales closed in October 2021 and the remainder of the sales are expected to close prior to the end of 2021. As a result of these sales, we expect to receive aggregate cash consideration of approximately $24 million, as well as certain non-cash consideration of approximately $13 million. The assets sold include certain of our manufacturing facilities in Chestnut Ridge, New York and Irvine, California, as well as certain U.S. generic retail products and certain related product inventory. Under the terms of the agreements, Strides will provide Endo with certain contract manufacturing and other services on a transitional basis. Endo will also provide Strides with certain transitional services.
During the third quarter of 2021, these assets and liabilities met the criteria to be classified as held for sale in the Condensed Consolidated Balance Sheets, at which time we ceased depreciating the related long-lived assets. We recognized an estimated expected pre-tax disposal loss of $42.2 million during the third quarter of 2021 to write down the carrying amount of the disposal group to fair value, less cost to sell, which we recorded in Asset impairment charges in the Condensed Consolidated Statements of Operations. Additionally, as a result of the transactions summarized above, we recognized a pre-tax reversal of accrued employee separation charges of $19.8 million during the third quarter of 2021, reflecting a reduction in related estimated cash outlays for employees expected to transition to the purchasers. These amounts are included in the quantitative disclosures of the 2020 Restructuring Initiative included in Note 4. Restructuring.
The following table provides the components of Assets and Liabilities held for sale as of September 30, 2021 (in thousands):
| September 30, 2021 | |||||
| Inventories, net | $ | ||||
| Property, plant and equipment, net | |||||
| Operating lease assets | |||||
| Other intangibles, net | |||||
| Impairment of carrying amount | ( | ||||
| Assets held for sale | $ | ||||
| Accounts payable and accrued expenses | |||||
| Operating lease liabilities | |||||
| Liabilities held for sale | $ | ||||
7
NOTE 4. RESTRUCTURING
Set forth below are disclosures relating to restructuring initiatives for which amounts recognized or cash expenditures during the three- or nine-month periods ended September 30, 2021 or 2020 were material or that had material restructuring liabilities at either September 30, 2021 or December 31, 2020.
2020 Restructuring Initiative
On November 5, 2020, the Company announced the initiation of several strategic actions to further optimize the Company’s operations and increase overall efficiency (the 2020 Restructuring Initiative). These actions are expected to generate significant cost savings that will be reinvested, among other things, to support the Company’s key strategic priority to expand and enhance its product portfolio. These actions include the following:
•Optimizing the Company’s retail generics business cost structure by exiting manufacturing sites in Irvine, California and Chestnut Ridge, New York, as well as active pharmaceutical ingredient manufacturing and bioequivalence study sites in India. The sites will be exited in a phased approach that is expected to be completed between the fourth quarter of 2021 and the second half of 2022, beginning with the sale transactions that are further discussed in Note 3. Discontinued Operations and Held for Sale. Certain products currently manufactured at the Irvine and Chestnut Ridge sites are expected to be transferred to other internal and external sites within the Company’s manufacturing network.
•Improving operating flexibility and reducing general and administrative costs by transferring certain transaction processing activities to third-party global business process service providers.
•Increasing organizational effectiveness by further integrating the Company’s commercial, operations and research and development functions, respectively, to support the Company’s key strategic priorities.
The amounts in this footnote related to the 2020 Restructuring Initiative include the sale transactions that are further discussed in Note 3. Discontinued Operations and Held for Sale.
As a result of the 2020 Restructuring Initiative, the Company’s global workforce is expected to be reduced by approximately 500 net full-time positions. The Company expects to realize annualized pre-tax cash savings (without giving effect to the costs described below) of approximately $85 million to $95 million by the first half of 2023, primarily related to reductions in Cost of revenues of approximately $65 million to $70 million and other expenses, including Selling, general and administrative and Research and development expenses, of approximately $20 million to $25 million.
As a result of the 2020 Restructuring Initiative, the Company expects to incur total pre-tax restructuring-related expenses of approximately $170 million to $190 million, of which approximately $145 million to $160 million relates to the Generic Pharmaceuticals segment, with the remaining amounts relating to our other segments and certain corporate unallocated costs. These estimates, which have been updated to reflect the effects the sale transactions that are further discussed in Note 3. Discontinued Operations and Held for Sale, consist of accelerated depreciation charges of approximately $45 million to $55 million, asset impairment charges of approximately $50 million, employee separation, continuity and other benefit-related costs of approximately $60 million to $65 million and certain other restructuring costs of approximately $15 million to $20 million. Cash outlays associated with the 2020 Restructuring Initiative are expected to be approximately $80 million and consist primarily of employee separation, continuity and other benefit-related costs and certain other restructuring costs. The Company anticipates these actions will be substantially completed by the end of 2022, with substantially all cash payments made by then.
8
The following pre-tax net amounts related to the 2020 Restructuring Initiative are included in the Company’s Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net restructuring charges (charge reversals) related to: | |||||||||||||||||||||||
| Accelerated depreciation | $ | $ | $ | $ | |||||||||||||||||||
| Asset impairments | |||||||||||||||||||||||
| Excess inventory reserves | |||||||||||||||||||||||
| Employee separation, continuity and other benefit-related costs | ( | ( | |||||||||||||||||||||
| Certain other restructuring costs | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
These pre-tax net amounts were primarily attributable to our Generic Pharmaceuticals segment, which incurred $31.0 million and $53.5 million of pre-tax net charges during the three and nine months ended September 30, 2021, respectively, and $57.8 million and $66.2 million of pre-tax net charges during the three and nine months ended September 30, 2020, respectively. The remaining amounts related to our other segments and certain corporate unallocated costs.
As of September 30, 2021, cumulative amounts incurred to date include charges related to accelerated depreciation of approximately $44.8 million, asset impairments related to identifiable intangible assets, certain operating lease assets and the disposal group that is further discussed in Note 3. Discontinued Operations and Held for Sale of approximately $49.5 million, excess inventory reserves of approximately $9.6 million, employee separation, continuity and other benefit-related costs of approximately $53.9 million and certain other restructuring costs of approximately $3.7 million. Of these amounts, approximately $132.4 million were attributable to the Generic Pharmaceuticals segment, with the remaining amounts relating to our other segments and certain corporate unallocated costs.
The following pre-tax net amounts related to the 2020 Restructuring Initiative are included in the Company’s Condensed Consolidated Statements of Operations during the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net restructuring charges (charge reversals) included in: | |||||||||||||||||||||||
| Cost of revenues | $ | ( | $ | $ | $ | ||||||||||||||||||
| Selling, general and administrative | |||||||||||||||||||||||
| Research and development | ( | ||||||||||||||||||||||
| Asset impairment charges | |||||||||||||||||||||||
| Total | $ | $ | $ | $ | |||||||||||||||||||
Changes to the liability for the 2020 Restructuring Initiative during the nine months ended September 30, 2021 were as follows (in thousands):
| Employee Separation, Continuity and Other Benefit-Related Costs | Certain Other Restructuring Costs | Total | |||||||||||||||
| Liability balance as of December 31, 2020 | $ | $ | $ | ||||||||||||||
| Net (charge reversals) charges | ( | ( | |||||||||||||||
| Cash payments | ( | ( | ( | ||||||||||||||
| Liability balance as of September 30, 2021 | $ | $ | $ | ||||||||||||||
Of the liability at September 30, 2021, $23.1 million is classified as current and is included in Accounts payable and accrued expenses in the Condensed Consolidated Balance Sheets, with the remaining amount classified as noncurrent and included in Other liabilities.
NOTE 5. SEGMENT RESULTS
The Company’s four reportable business segments are Branded Pharmaceuticals, Sterile Injectables, Generic Pharmaceuticals and 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.
9
We evaluate segment performance based on Segment adjusted income (loss) from continuing operations before income tax, which we define as (Loss) income from continuing operations before income tax and before certain upfront and milestone payments to partners; acquisition-related and integration items, including transaction costs and changes in the fair value of contingent consideration; cost reduction and integration-related initiatives such as separation benefits, continuity payments, other exit costs and certain costs associated with integrating an acquired company’s operations; certain amounts related to strategic review initiatives; asset impairment charges; amortization of intangible assets; inventory step-up recorded as part of our acquisitions; litigation-related and other contingent matters; certain legal costs; gains or losses from early termination of debt; debt modification costs; gains or losses from the sales of businesses and other assets; foreign currency gains or losses on intercompany financing arrangements; and certain other items.
Certain of the corporate expenses incurred by the Company are not directly 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 Total segment adjusted income (loss) from continuing operations before income tax is equal to the combined results of each of its segments.
Branded Pharmaceuticals
Our Branded Pharmaceuticals segment includes a variety of branded products in the areas of urology, orthopedics, endocrinology, medical aesthetics and bariatrics, among others. The products in this segment include XIAFLEX®, SUPPRELIN® LA, NASCOBAL® Nasal Spray, AVEED®, QWO®, PERCOCET®, TESTOPEL®, EDEX® and LIDODERM®, among others.
Sterile Injectables
Our Sterile Injectables segment consists primarily of branded sterile injectable products such as VASOSTRICT®, ADRENALIN® and APLISOL®, among others, and certain generic sterile injectable products, including ertapenem for injection (the authorized generic of Merck Sharp & Dohme Corp.’s (Merck) Invanz®) and ephedrine sulfate injection, among others.
Generic Pharmaceuticals
Our Generic Pharmaceuticals segment consists of a product portfolio including solid oral extended-release, solid oral immediate-release, liquids, semi-solids, patches, powders, ophthalmics and sprays and includes products that treat and manage a wide of medical conditions.
International Pharmaceuticals
Our International Pharmaceuticals segment includes a variety of specialty pharmaceutical products sold outside the U.S., primarily in Canada through our operating company Paladin Labs Inc. (Paladin). The key products of this segment serve various therapeutic areas, including attention deficit hyperactivity disorder, pain, women’s health, oncology and transplantation.
The following represents selected information for the Company’s reportable segments for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenues from external customers: | |||||||||||||||||||||||
| Branded Pharmaceuticals | $ | $ | $ | $ | |||||||||||||||||||
| Sterile Injectables | |||||||||||||||||||||||
| Generic Pharmaceuticals | |||||||||||||||||||||||
| International Pharmaceuticals (1) | |||||||||||||||||||||||
| Total net revenues from external customers | $ | $ | $ | $ | |||||||||||||||||||
| Segment adjusted income (loss) from continuing operations before income tax: | |||||||||||||||||||||||
| Branded Pharmaceuticals | $ | $ | $ | $ | |||||||||||||||||||
| Sterile Injectables | |||||||||||||||||||||||
| Generic Pharmaceuticals | ( | ||||||||||||||||||||||
| International Pharmaceuticals | |||||||||||||||||||||||
| Total segment adjusted income (loss) from continuing operations before income tax | $ | $ | $ | $ | |||||||||||||||||||
__________
(1)Revenues generated by our International Pharmaceuticals segment are primarily attributable to external customers located in Canada.
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There were no material revenues from external customers attributed to an individual country outside of the U.S. during any of the periods presented.
The table below provides reconciliations of our Total consolidated (loss) income from continuing operations before income tax, which is determined in accordance with U.S. GAAP, to our Total segment adjusted income (loss) from continuing operations before income tax for the three and nine months ended September 30, 2021 and 2020 (in thousands):
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Total consolidated (loss) income from continuing operations before income tax | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Corporate unallocated costs (1) | |||||||||||||||||||||||
| Amortization of intangible assets | |||||||||||||||||||||||
| Upfront and milestone payments to partners | |||||||||||||||||||||||
| Amounts related to continuity and separation benefits, cost reductions and strategic review initiatives (2) | |||||||||||||||||||||||
| Certain litigation-related and other contingencies, net (3) | ( | ||||||||||||||||||||||
| Certain legal costs (4) | |||||||||||||||||||||||
| Asset impairment charges (5) | |||||||||||||||||||||||
| Acquisition-related and integration items, net (6) | ( | ( | ( | ||||||||||||||||||||
| Loss on extinguishment of debt | |||||||||||||||||||||||
| Foreign currency impact related to the remeasurement of intercompany debt instruments | ( | ( | |||||||||||||||||||||
| Other, net (7) | ( | ( | ( | ||||||||||||||||||||
| Total segment adjusted income (loss) from continuing operations before income tax | $ | $ | $ | $ | |||||||||||||||||||
__________
(1)Amounts include certain corporate overhead costs, such as headcount, facility and corporate litigation expenses and certain other income and expenses.
(2)Amounts for the three months ended September 30, 2021 include net employee separation, continuity and other benefit-related charge reversals of $11.3 million, accelerated depreciation charges of $6.4 million and other net charges, including those related to strategic review initiatives, of $24.8 million. Amounts for the nine months ended September 30, 2021 include net employee separation, continuity and other benefit-related charge reversals of $1.2 million, accelerated depreciation charges of $22.3 million and other net charges, including those related to strategic review initiatives, of $37.5 million. Amounts for the three months ended September 30, 2020 include net employee separation, continuity and other benefit-related charges of $58.0 million, accelerated depreciation charges of $6.3 million and other net charges, including those related to strategic review initiatives, of $3.4 million. Amounts for the nine months ended September 30, 2020 include net employee separation, continuity and other benefit-related charges of $75.9 million, accelerated depreciation charges of $14.7 million and other net charges, including those related to strategic review initiatives, of $9.8 million. These amounts relate primarily to our restructuring activities as further described in Note 4. Restructuring, certain continuity and transitional compensation arrangements, certain other cost reduction initiatives and certain strategic review initiatives.
(3)Amounts include adjustments to our accruals for litigation-related settlement charges and certain settlement proceeds related to suits filed by our subsidiaries. Our material legal proceedings and other contingent matters are described in more detail in Note 13. Commitments and Contingencies.
(4)Amounts relate to opioid-related legal expenses.
(5)Amounts primarily relate to charges to impair goodwill and intangible assets as further described in Note 9. Goodwill and Other Intangibles, as well as certain disposal group impairment charges as further discussed in Note 3. Discontinued Operations and Held for Sale.
(6)Amounts primarily relate to changes in the fair value of contingent consideration.
(7)Amounts for the three and nine months ended September 30, 2021 primarily relate to a gain of $4.9 3.9 million of third party fees incurred in connection with the March 2021 Refinancing Transactions, which were accounted for as debt modification costs. Amounts for the nine months ended September 30, 2020 include $31.1
Asset information is not reviewed or included within our internal management reporting. Therefore, the Company has not disclosed asset information for each reportable segment.
11
During the three and nine months ended September 30, 2021 and 2020, the Company disaggregated its revenue from contracts with customers into the categories included in the table below (in thousands). The Company believes these categories depict how the nature, timing and uncertainty of revenue and cash flows are affected by economic factors.
| Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Branded Pharmaceuticals: | |||||||||||||||||||||||
| Specialty Products: | |||||||||||||||||||||||
XIAFLEX® | $ | $ | $ | $ | |||||||||||||||||||
SUPPRELIN® LA | |||||||||||||||||||||||
| Other Specialty (1) | |||||||||||||||||||||||
| Total Specialty Products | $ | $ | $ | $ | |||||||||||||||||||
| Established Products: | |||||||||||||||||||||||
PERCOCET® | $ | $ | $ | $ | |||||||||||||||||||
TESTOPEL® | |||||||||||||||||||||||
| Other Established (2) | |||||||||||||||||||||||
| Total Established Products | $ | $ | $ | $ | |||||||||||||||||||
| Total Branded Pharmaceuticals (3) | $ | $ | $ | $ | |||||||||||||||||||
| Sterile Injectables: | |||||||||||||||||||||||
VASOSTRICT® | $ | $ | $ | $ | |||||||||||||||||||
ADRENALIN® | |||||||||||||||||||||||
| Other Sterile Injectables (4) | |||||||||||||||||||||||
| Total Sterile Injectables (3) | $ | $ | $ | $ | |||||||||||||||||||
| Total Generic Pharmaceuticals (5) | |||||||||||||||||||||||