Note 23. Quarterly Financial Information (Unaudited)

Lannett’s quarterly consolidated results of operations are shown below:

	Fourth			Third			Second			First
(In thousands, except per share data)	Quarter			Quarter			Quarter			Quarter
Fiscal 2018
Net sales	$	170,911		$	174,386		$	184,305		$	154,961
Cost of sales	104,383			107,329			96,855			87,290

Gross profit	66,528			67,057			87,450			67,671
Operating expenses	57,926			33,777			40,315			26,992

Operating income	8,602			33,280			47,135			40,679
Other loss	(20,844		)	(22,785		)	(14,975		)	(19,999		)
Income tax expense (benefit)	(883		)	(2,275		)	18,138			7,423
Net income (loss) attributable to Lannett Company, Inc.	$	(11,359	)	$	12,770		$	14,022		$	13,257

Earnings (loss) per common share attributable to Lannett Company Inc. (1)
Basic	$	(0.30	)	$	0.34		$	0.38		$	0.36

Diluted	$	(0.30	)	$	0.33		$	0.37		$	0.35

	Fourth			Third			Second			First
(In thousands, except per share data)	Quarter			Quarter			Quarter			Quarter
Fiscal 2017
Net sales	$	139,118		$	165,720		$	170,944		$	161,559
Settlement agreement	—			(4,000		)	—			—

Total net sales	139,118			161,720			170,944			161,559
Cost of sales	80,240			89,290			82,891			79,707

Gross profit	58,878			72,430			88,053			81,852
Operating expenses	30,069			28,793			53,747			102,158

Operating income (loss)	28,809			43,637			34,306			(20,306		)
Other loss	(19,983		)	(21,371		)	(22,578		)	(21,964		)
Income tax expense (benefit)	3,100			7,337			3,542			(12,882		)
Less: Net income attributable to noncontrolling interest	—			—			14			20

Net income (loss) attributable to Lannett Company, Inc.	$	5,726		$	14,929		$	8,172		$	(29,408	)

Earnings (loss) per common share attributable to Lannett Company Inc. (1)
Basic	$	0.16		$	0.41		$	0.22		$	(0.80	)

Diluted	$	0.15		$	0.40		$	0.22		$	(0.80	)

	Fourth			Third			Second			First
(In thousands, except per share data)	Quarter			Quarter			Quarter			Quarter
Fiscal 2016
Net sales	$	168,887		$	163,712		$	127,059		$	106,433
Settlement agreement	—			(23,598		)	—			—

Total net sales	168,887			140,114			127,059			106,433
Cost of sales	88,957			82,623			55,414			29,006

Gross profit	79,930			57,491			71,645			77,427
Operating expenses	49,535			38,874			41,320			26,006

Operating income	30,395			18,617			30,325			51,421
Other loss	(29,752		)	(26,830		)	(10,827		)	(1,170		)
Income tax expense (benefit)	(2,948		)	(2,743		)	5,958			17,055
Less: Net income attributable to noncontrolling interest	20			20			20			15

Net income (loss) attributable to Lannett Company, Inc.	$	3,571		$	(5,490	)	$	13,520		$	33,181

Earnings (loss) per common share attributable to Lannett Company Inc. (1)
Basic	$	0.10		$	(0.15	)	$	0.37		$	0.91

Diluted	$	0.10		$	(0.15	)	$	0.36		$	0.89

(1)Due to differences in weighted average common shares outstanding, quarterly earnings per share may not add up to the totals reported for the full fiscal year.

The increase in net sales and gross profit in the second quarter of Fiscal 2018 is primarily due to a temporary disruption of our competitor’s supplies in the Thyroid Deficiency and Migraine medical indications. The declines in operating income in the third and fourth quarters of Fiscal 2018 were primarily related to a loss on sale of an intangible asset and asset impairment charges as a result of the Cody Restructuring Plan as well as other activities related to the consolidation of the Company’s manufacturing facilities. Income tax expense in the second quarter of Fiscal 2018 was negatively impacted due to the adoption of 2017 Tax Reform which resulted in a revaluation of the Company’s net long term deferred tax assets.

The decline in operating income in the first and second quarters of Fiscal 2017 is primarily attributable to a $65.1 million and $23.0 million intangible assets impairment charge, respectively. Total net sales in the third and fourth quarters of Fiscal 2017 were negatively impacted by $4.5 million and $5.7 million, respectively, due to the Bipartisan Budget Act of 2015 which required drug manufacturers to pay additional rebates to state Medicaid programs. Total net sales in the third quarter of Fiscal 2017 was also negatively impacted by a $4.0 million adjustment to the Fiscal 2016 settlement agreement amount with a former customer.

The decline in operating income in the third and fourth quarters of Fiscal 2016 is primarily attributable to a $23.6 million settlement agreement with a former customer and an $8.0 million intangible assets impairment charge, respectively. Net income attributable to Lannett Company, Inc. in the fourth quarter of Fiscal 2016 also included a $3.0 million loss on extinguishment of debt.

The decrease in the effective tax rate in the fourth quarter of Fiscal 2016 is primarily due to state deferred tax benefits recorded as a result of the KUPI acquisition. In addition, research and development tax credits and domestic manufacturing deductions relative to pre-tax income also contributed to the lower rate.