EMPLOYEE BENEFIT PLANS

In connection with the B&L Acquisition completed on August 5, 2013, the Company assumed all of B&L’s 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.

In addition, outside of the U.S., a limited group of Valeant employees are covered by defined benefit pension plans. The Company assumed all of Valeant’s defined benefit obligations and related plan assets in connection with the Merger.

The Company uses December 31 as the year-end measurement date for all of its defined benefit pension plans and the postretirement benefit plan.

Accounting for Pension Benefit Plans and Postretirement Benefit Plan

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 plans 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.

Included in accumulated other comprehensive loss as of December 31, 2013 are unrecognized actuarial gains of $11.2 million and $12.7 million related to the Company’s U.S. pension benefit plan and the non-U.S. pension benefit plans, respectively. Also included in accumulated other comprehensive loss at December 31, 2013 are unrecognized prior service credits of $27.9 million, resulting from a negative plan amendment, as discussed below, and unrecognized actuarial gains of $1.0 million related to the U.S. postretirement benefit plan. Of the December 31, 2013 amounts, the Company expects to recognize $2.5 million of unrecognized prior service credits in net periodic benefit cost during 2014.

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 year ended December 31, 2013:



	Pension Benefit Plans						Postretirement Benefit Plan
	U.S. Plan			Non-U.S. Plans			Postretirement Benefit Plan
	2013
Service cost	$	132		$	2,200		$	877
Interest cost	4,513			3,721			1,610
Expected return on plan assets	(5,913		)	(3,082		)	(316		)
Amortization of net loss	—			3			—
Settlement (gain) loss recognized	(100		)	617			—
Net periodic (benefit) cost	$	(1,368	)	$	3,459		$	2,171

For the years ended December 31, 2012 and 2011, the net periodic cost, which relates to the legacy Valeant defined benefit plans in Mexico, was not material to the Company’s results of operations.

Benefit Obligation, Change in Plan Assets and Funded Status

The table below presents components of the change in projected benefit obligation, change in plan assets and funded status at December 31, 2013 and 2012:



	Pension Benefit Plans											Postretirement Benefit Plan⁽²⁾
	U.S. Plan					Non-U.S. Plans						Postretirement Benefit Plan⁽²⁾
	2013			2012⁽¹⁾		2013			2012			2013
Change in Projected benefit Obligation
Projected benefit obligation, beginning of year	$	—		$	—	$	6,967		$	5,991		$	—
Service cost	132			—		2,200			869			877
Interest cost	4,513			—		3,721			437			1,610
Acquisition of B&L	244,184			—		223,965			—			87,565
Employee contributions	—			—		11			—			370
Plan amendments⁽³⁾	—			—		—			—			(27,945		)
Settlements⁽⁴⁾	(5,280		)	—		(119		)	(860		)	—
Benefits paid	(4,272		)	—		(3,558		)	(556		)	(2,995		)
Actuarial (gains) losses	(4,571		)	—		(10,135		)	571			(265		)
Currency translation adjustments	—			—		6,666			515			—
Other	—			—		(6		)	—			—
Projected benefit obligation, end of year	234,706			—		229,712			6,967			59,217

Change in Plan Assets
Fair value of plan assets, beginning of year	$	—		$	—	$	1,306		$	693		$	—
Actual return on plan assets	12,676			—		5,063			163			1,094
Employee contributions	—			—		11			—			370
Company contributions	3,270			—		6,955			1,795			—
Acquisition of B&L	190,946			—		125,643			—			16,095
Settlements⁽⁴⁾	(5,280		)	—		(119		)	(860		)	—
Benefits paid	(4,272		)	—		(3,558		)	(556		)	(2,995		)
Currency translation adjustments	—			—		3,844			71			—
Other	—			—		(6		)	—			—
Fair value of plan assets, end of year	197,340			—		139,139			1,306			14,564
Funded Status at end of year	$	(37,366	)	$	—	$	(90,573	)	$	(5,661	)	$	(44,653	)

Recognized as:
Other long-term assets, net	$	—		$	—	$	1,471		$	—		$	—
Accrued and other current liabilities	—			—		(2,047		)	(336		)	—
Pension and other benefit liabilities	(37,366		)	—		(89,997		)	(5,325		)	(44,653		)

____________________________________


(1)	In 2012, the Company did not have U.S pension benefit plans.


(2)	Assumed in connection with the B&L Acquisition, as described above.

(3)

In the fourth quarter of 2013, the Company announced that effective January 1, 2014, B&L will no longer offer medical and life insurance coverage to new retirees. The reduction in medical benefits was accounted for as a negative plan amendment resulting in an accumulated postretirement benefit obligation reduction of $27.9 million that was recognized as a component of accumulated other comprehensive loss and will be amortized into income over approximately 11.3 years.


(4)	The 2013 plan settlements primarily reflect lump sum benefit payments made to terminating employees of the U.S. pension benefit plan. The 2012 plan settlements reflect lump sum benefit payments made to terminating employees of the legacy Valeant defined benefit pension plans.

The increase in pension and other benefit 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.

A number of the Company’s pension benefit plans were underfunded at December 31, 2013, having accumulated benefit obligations exceeding the fair value of plan assets. Information for the underfunded plans is presented in the following table:



	Pension Benefit Plans
	U.S. Plan				Non-U.S. Plans
	2013		2012		2013		2012
Projected benefit obligation	$	234,706	$	—	$	224,059	$	6,967
Accumulated benefit obligation	234,706		—		196,255		5,134
Fair value of plan assets	197,340		—		132,172		1,306

Information for the pension benefit plans that are underfunded on a projected benefit obligation basis (versus underfunded on an accumulated benefit basis as in the table above) is presented in the following table:



	Pension Benefit Plans
	U.S. Plan				Non-U.S. Plans
	2013		2012		2013		2012
Projected benefit obligation	$	234,706	$	—	$	225,468	$	6,967
Fair value of plan assets	197,340		—		133,424		1,306

The Non-U.S. Plans’ accumulated benefit obligation for both the funded and underfunded pension benefit plans was $201.5 and $5.1 at December 31, 2013 and December 31, 2012, respectively.

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. In 2014, the Company expects to contribute $10.8 million and $8.5 million to the U.S and Non-U.S. pension benefit plans, respectively.

The Company plans to use postretirement benefit plan assets to fund postretirement benefit plan benefit payments in 2014.

Estimated Future Benefit Payments

Future benefit payments over the next 10 years 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
2014	$	12,629	$	6,461	$	7,358
2015	19,434		4,986		6,800
2016	19,142		4,741		6,284
2017	19,277		4,745		5,738
2018	18,398		4,971		5,256
2019-2023	88,639		35,921		20,361

Assumptions

The weighted-average assumptions used to determine net periodic benefit costs and benefit obligations at December 31, 2013 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	3.61	%
Expected rate of return on plan assets	5.59	%
Rate of compensation increase	2.80	%
For Determining Benefit Obligation
U.S. Plans:
Discount rate	4.70	%	4.30	%
Rate of compensation increase	—		—
Non-U.S. Plans:
Discount rate	3.85	%
Rate of compensation increase	2.88	%

____________________________________


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

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 for 2013 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.

The 2014 expected rate of return for the U.S. pension benefit plan and the U.S. postretirement benefit plan will remain at 7.50% percent and 5.50%, respectively. The 2014 expected rate of return for the Ireland pension benefit plans will also remain at 6.0%.

Plan Assets

Pension and postretirement benefit plan assets are invested in several asset categories. The following presents the actual asset allocation as of December 31, 2013:



	Pension Benefit Plans		Postretirement Benefit Plan
	2013		2013
U.S. Plan
Equity securities	60.00	%	63.00	%
Fixed income securities	40.00	%	24.00	%
Cash	—	%	13.00	%
Non-U.S. Plans
Equity securities	43.02	%
Fixed income securities	46.67	%
Other	10.31	%

The investment strategy underlying pension plan asset allocation is to manage the assets of the plan to provide for the long-term liabilities while maintaining sufficient liquidity to pay current benefits. Pension plan assets are diversified to protect against large investment losses and to reduce the probability of excessive performance volatility. Diversification of assets is achieved by allocating funds to various asset classes and investment styles within asset classes, and retaining investment management firm(s) with complementary investment philosophies, styles and approaches.

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 by investment category as of December 31, 2013 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 December 31, 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⁾	$	442	$	—	$	—	$	442
Commingled funds:⁽²⁾⁽³⁾
Equity securities:
U.S. broad market	—		72,651		—		72,651
Emerging markets	—		16,551		—		16,551
Non-U.S. developed markets	—		27,896		—		27,896
Fixed income securities:
Investment grade	—		58,962		—		58,962
Global high yield	—		20,838		—		20,838
	$	442	$	196,898	$	—	$	197,340



	Pension Benefit Plans - Non-U.S. Plans
	As of December 31, 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⁾	$	9,332	$	—	$	—	$	9,332
Commingled funds:⁽²⁾⁽³⁾
Equity securities:
Emerging markets	—		945		—		945
Worldwide developed markets	—		59,153		—		59,153
Fixed income securities:
Investment grade	—		21,351		—		21,351
Global high yield	—		651		—		651
Government bond funds	—		42,535		—		42,535
Other assets	—		5,172		—		5,172
	$	9,332	$	129,807	$	—	$	139,139



	Postretirement Benefit Plan
	As of December 31, 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	$	1,853	$	—	$	—	$	1,853
Insurance policies⁽⁴⁾	—		12,711		—		12,711
	$	1,853	$	12,711	$	—	$	14,564

____________________________________


(1)	Cash equivalents consisted primarily of term deposits and money market instruments. The fair value of the term deposits approximates their carrying amounts due to their short term maturities. The money market instruments also have short maturities and are valued using a market approach based on the quoted market prices of identical instruments.


(2)	Commingled funds are not publicly traded. The underlying assets in these funds are publicly traded on the exchanges and have readily available price quotes. The Ireland pension plans held approximately 85% of the non-U.S. commingled funds in 2013. The commingled funds held by the U.S. and Ireland pension plans are primarily invested in index funds.


(3)	The underlying assets in the fixed income funds are generally valued using the net asset value per fund share, which is derived using a market approach with inputs that include broker quotes, benchmark yields, base spreads and reported trades.

(4)

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.

There were no transfers between Level 1 and Level 2 during the year ended December 31, 2013.

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:



	2013
Health care cost trend rate assumed for next year	7.57	%
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	$	1,009	$	933

Defined Contribution Plans

The Company sponsors defined contribution plans in the U.S., Ireland and certain other countries. Under these plans, employees are allowed to contribute a portion of their salaries to the plans, and the Company matches a portion of the employee contributions. The Company contributed $16.4 million, $2.8 million and $2.1 million to these plans in the years ended December 31, 2013, 2012 and 2011, respectively. The increase in the Company’s costs associated with the defined contribution plans in 2013 was driven by the plans assumed as part of the B&L Acquisition.