PENSION AND POSTRETIREMENT EMPLOYEE BENEFIT PLANS

In connection with the B&L Acquisition completed on August 5, 2013, the Company assumed all of B&L’s defined benefit obligations and related plan assets. This includes defined benefit plans and a participatory defined benefit postretirement medical and life insurance plan, which covers a closed grandfathered group of legacy B&L U.S. employees and employees in certain other countries. The U.S. defined benefit accruals were frozen as of December 31, 2004 and benefits that were earned up to December 31, 2004 were preserved. Participants continue to earn interest credits on their cash balance. The most significant non-U.S. plans are two defined benefit plans in Ireland, which comprise approximately 80% of the benefit obligations of the non-U.S. defined benefit pension plans as of the B&L Acquisition date. Both Ireland plans were closed to future service benefit accruals in 2011. All of the pension benefits that were earned prior to the closure of the plans were preserved; however, the only additional benefits that accrue are annual salary and inflation increases. The postretirement benefit plan was amended effective January 1, 2005 to eliminate employer contributions after age 65 for participants who did not meet the minimum requirements of age and service on that date. The employer contributions for medical and prescription drug benefits for participants retiring after March 1, 1989 were frozen effective January 1, 2010.

The Company recognizes on its balance sheet an asset or liability equal to the over-or under-funded benefit obligation of each defined benefit pension plan and other postretirement benefit plan. Actuarial gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost are recognized, net of tax, as a component of other comprehensive income. As of September 30, 2013 and December 31, 2012, the Company recognized the under-funded financial position of these plans in accrued liabilities and other current liabilities of $0.3 million and $0.4 million and other long-term liabilities of $231.0 million and $5.3 million, respectively. The increase in other long-term liabilities was driven by the plans assumed as part of the B&L Acquisition, as described above. The balances at December 31, 2012 relate to legacy Valeant defined benefit pension plans which cover certain employees in Mexico.

Net Periodic Benefit Cost

The following table provides the components of net periodic benefit cost for the Company’s defined benefit pension plans and postretirement benefit plan for the three-month and nine-month periods ended September 30, 2013:



	Pension Benefit Plans						Postretirement Benefit Plan
	U.S. Plan			Non-U.S. Plans			Postretirement Benefit Plan
	Three Months Ended September 30, 2013
Service cost	$	53		$	731		$	350
Interest cost	1,799			1,406			642
Expected return on plan assets	(2,357		)	(1,202		)	(126		)
Net periodic benefit cost	$	(505	)	$	935		$	866



	Pension Benefit Plans						Postretirement Benefit Plan
	U.S. Plan			Non-U.S. Plans			Postretirement Benefit Plan
	Nine Months Ended September 30, 2013
Service cost	$	53		$	1,211		$	350
Interest cost	1,799			1,612			642
Expected return on plan assets	(2,357		)	(1,244		)	(126		)
Amortization of net loss	—			1			—
Net periodic benefit cost	$	(505	)	$	1,580		$	866

For the three-month and nine-month periods ended September 30, 2012, the net periodic cost, which relates to the legacy Valeant defined benefit pension plans in Mexico, was not material to the Company’s results of operations. The Company’s policy for funding its pension benefit plans is to make contributions that meet or exceed the minimum statutory funding requirements. These contributions are determined based upon recommendations made by the actuary under accepted actuarial principles. The Company expects to contribute $2.0 million and $3.3 million to the U.S and Non-U.S. pension benefit plans, respectively, during the fourth quarter of 2013.

The Company plans to use postretirement benefit plan assets to fund postretirement benefit plan benefit payments in 2013.

Estimated Future Benefit Payments

Future benefit payments for the pension benefit plans and the postretirement benefit plan, which reflect expected future service, as appropriate, are expected to be paid as follows:



	Pension Benefit Plans				Postretirement Benefit Plan
	U.S. Plan		Non-U.S. Plans		Postretirement Benefit Plan
2013 ⁽¹⁾	$	4,168	$	1,198	$	2,032
2014	12,638		3,714		8,051
2015	19,443		4,328		7,922
2016	19,150		3,604		7,772
2017	19,285		4,403		7,491
Thereafter	90,377		30,849		33,212

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(1)	Covers the fourth quarter of 2013.

Assumptions

The weighted-average assumptions used to determine net periodic benefit costs and benefit obligations for all assumed B&L defined benefit obligations and related plan assets at the B&L Acquisition date were as follows:



	Pension Benefit Plans		Postretirement Benefit Plan⁽¹⁾
	Pension Benefit Plans		Postretirement Benefit Plan⁽¹⁾
For Determining Net Periodic Benefit Cost
U.S. Plans:
Discount rate	4.50	%	4.50	%
Expected rate of return on plan assets	7.50	%	5.50	%
Rate of compensation increase	—		—
Non-U.S. Plans:
Discount rate	3.48	%
Expected rate of return on plan assets	5.57	%
Rate of compensation increase	2.80	%
For Determining Benefit Obligation
U.S. Plans:
Discount rate	4.50	%	4.50	%
Rate of compensation increase	—		—
Non-U.S. Plans:
Discount rate	3.48	%
Rate of compensation increase	2.80	%

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(1)	The Company does not have non-U.S. postretirement benefit plans.

The benefit obligations for all assumed B&L defined benefit obligations at the B&L Acquisition date amounted to $555.7 million, in the aggregate, which includes $244.2 million, $224.0 million and $87.5 million related to the U.S. pension benefit plan, the non-U.S. pension benefit plans and the U.S. postretirement benefit plan, respectively. The expected long-term rate of return on plan assets was developed based on a capital markets model that uses expected asset class returns, variance and correlation assumptions. The expected asset class returns were developed starting with current Treasury (for the U.S. pension plan) or Eurozone (for the Ireland pension plans) government yields and then adding corporate bond spreads and equity risk premiums to develop the return expectations for each asset class. The expected asset class returns are forward-looking. The variance and correlation assumptions are also forward-looking. They take into account historical relationships, but are adjusted to reflect expected capital market trends. The expected return on plan assets for the Company’s U.S. pension plan was 7.50% and for the postretirement benefit plan was 5.50%. The expected return for the postretirement plan is based on the expected return for the U.S. pension plan reduced by 2.0% to reflect an estimate of additional administrative expenses. The expected return on plan assets for the Company’s Ireland pension plans was 6.0%.

The discount rate used to determine benefit obligations represents the current rate at which the benefit plan liabilities could be effectively settled considering the timing of expected payments for plan participants.

Plan Assets

Pension and postretirement benefit plan assets assumed in connection with the B&L Acquisition are invested in several asset categories. The following presents target asset allocations for 2013:



	Pension Benefit Plans		Postretirement Benefit Plan
	Pension Benefit Plans		Postretirement Benefit Plan
U.S. Plan	2013 Target Allocation
Equity securities	60.00	%	70.00	%
Fixed income securities	40.00	%	30.00	%
Non-U.S. Plans
Equity securities	46.33	%
Fixed income securities	41.78	%
Other	11.89	%

The Company’s pension plan assets are managed by outside investment managers using a total return investment approach, whereby a mix of equity and debt securities investments are used to maximize the long-term rate of return on plan assets. A significant portion of the assets of the U.S. and Ireland pension plans have been invested in equity securities, as equity portfolios have historically provided higher returns than debt and other asset classes over extended time horizons. Correspondingly, equity investments also entail greater risks than other investments. Equity risks are balanced by investing a significant portion of plan assets in broadly diversified fixed income securities.

Fair Value of Plan Assets

The Company measured the fair value of plan assets based on the prices that would be received to sell an asset or paid to transfer a liability in an olderly transaction between market participants at the measurement date. Fair value measurements are based on a three-tier hierarchy described in note 7 titled “FAIR VALUE MEASUREMENTS”.

The table below presents total plan assets assumed in connection with the B&L Acquisition by investment category as of the B&L Acquisition date and the classification of each investment category within the fair value hierarchy with respect to the inputs used to measure fair value:



	Pension Benefit Plans - U.S. Plans
	As of August 5, 2013
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash & cash equivalents	$	1,117	$	—	$	—	$	1,117
Commingled funds:
Equity securities:
U.S. broad market	—		72,387		—		72,387
Emerging markets	—		15,502		—		15,502
Non-U.S. developed markets	—		26,762		—		26,762
Fixed income securities:
Investment grade	—		55,186		—		55,186
Global high yield	—		19,992		—		19,992
	$	1,117	$	189,829	$	—	$	190,946



	Pension Benefit Plans - Non-U.S. Plans
	As of August 5, 2013
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash & cash equivalents	$	4,975	$	—	$	—	$	4,975
Commingled funds:
Equity securities:
Worldwide developed markets	—		64,204		—		64,204
Fixed income securities:
Investment grade	—		5,216		—		5,216
Government bond funds	—		47,122		—		47,122
Other assets	—		4,125		—		4,125
	$	4,975	$	120,667	$	—	$	125,642



	Postretirement Benefit Plan
	As of August 5, 2013
Assets	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Cash	$	3,578	$	—	$	—	$	3,578
Insurance policies⁽¹⁾	—		12,517		—		12,517
	$	3,578	$	12,517	$	—	$	16,095

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(1)

The insurance policies held by the postretirement benefit plan consist of variable life insurance contracts whose fair value is their cash surrender value. Cash surrender value is the amount currently payable by the insurance company upon surrender of the policy. The cash surrender value is based principally on the net asset values of the underlying trust funds, adjusted by annuity factors incorporating mortality, plan expenses and income reinvestment. The trust funds are commingled funds that are not publicly traded. The underlying assets in these funds are primarily publicly traded on exchanges and have readily available price quotes.

Health Care Cost Trend Rate

The health care cost trend rate assumptions for the postretirement benefit plan assumed in connection with the B&L Acquisition are as follows:



	As of August 5, 2013
Health care cost trend rate assumed in 2013	7.84	%
Rate to which the cost trend rate is assumed to decline	4.50	%
Year that the rate reaches the ultimate trend rate	2029

A one percentage point change in health care cost trend rate would have had the following effects:



	One Percentage Point
	Increase		Decrease
Effect on benefit obligations	$	918	$	846